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PETROCHEMICALS Win-Win, or Win-Lose? IPCL will look a lot more attractive without its Baroda unit, but you can't say the same for IOC, which will inherit it. By Ranju Sarkar
But will all go well? You can't be too sure when it's the government, which owns 81 per cent of IOC, that's pulling the strings. In other words, IOC Chief Executive M.A. Pathan has little choice but to go by the Vajpayee administration's decree: to sell IPCL's Baroda complex to IOC on an ''as is where is basis, including the employees''. IOC has engaged a financial consultant to conduct a due-diligence exercise at IPCL's Baroda unit. ''The project is under evaluation. We have to see how it adds value,'' says Pathan, somewhat inscrutably. On the surface, the proposed restructuring-apparently the brainchild of Disinvestment Minister Arun Shourie-doesn't look outlandish. After all, there is plenty of synergy between IOC's Koyali refinery and IPCL's Baroda complex, with IOC supplying naphtha for over three decades to the latter. In fact, as Ashok Chawla, Joint Secretary, Department of Chemicals, Ministry of Chemicals & Fertilisers-and also the acting CEO of IPCL-points out: ''IOC has always been keen on IPCL's Baroda unit. If they can scale up the ethylene plant, it could become a major outlet for naphtha.'' IOC's refinery produces nearly 1.5 million tonnes of naphtha (12.5 per cent of its 12 million tonne capacity), and is venturing into petrochemicals to add value. Indeed, the acquisition of the Baroda unit, which makes fibres and chemicals, fits in well with IOC's objective of emerging as a vertically integrated player, with a presence in crude, refinery, petrochemicals, and power. The consolidation will also benefit IOC's naphtha business. Today, a sales tax of 22 per cent is added on to IOC's naphtha making customers opt for cheaper imports or naphtha from Reliance's Hazira plant, which enjoys the benefit of some tax concessions. Last year, for instance, IPCL imported 70 per cent of its naphtha requirements. The acquisition and the subsequent intra-company transfer of naptha should help IOC, especially since Western India is reeling under a glut of the commodity. IPCL Benefits...
IPCL, for its part, stands to gain plenty as well. For, the proceeds of the asset sale will go directly into the company's coffers, rather than to the government, as this will be a deal between two companies. IPCL will now be out of the fibres business as well as most of chemicals business (except for Mono Ethylene Glycol, which it makes at Baroda and Nagothane), making it a company focused almost entirely on polymers, where it has a 29 per cent share (Reliance has 44 per cent). What makes IPCL more attractive now is that it's got rid of the not-so-cost-effective naphtha-based unit. Its plants at Nagothane and Dahej run on gas, which is 25 per cent cheaper than naphtha. A more focused IPCL will obviously raise the government's expectations on the disinvestment front, and unlike the last time round when a few bidders dropped out, this time it can expect greater interest-and better value. For instance, a disinvestment in IPCL today, inclusive of Baroda, would fetch the government Rs 76 per share (market price on the Bombay Stock Exchange on February 6, 2001); without Baroda, it could hope for anything above Rs 100, even close to Rs 150. To be sure, IPCL without the fibres and chemicals businesses looks mean and trim, but spare a thought for IOC, which will inherit the Baroda unit. True, there are synergies, cost savings and all that... ...But Baroda Isn't Beautiful Don't forget that the Baroda plant is almost 30 years old, has a bloated workforce (9,000 employees who account for nearly three-fourths of the total strength, but who contribute just 30 per cent of volume sales), and requires huge investments. For instance, the 125,000-tpa ethylene cracker (put up in 1978) needs to replaced with a global-scale ethylene cracker of 750,000 tonnes. Experts estimate that this, together with a 300,000-tonne propylene plant, would cost close to Rs 2,500 crore, while other downstream expansions could cost another Rs 2,000 crore. Pathan is aware of the challenges: ''We have to look at the high manpower base, the investment required, and the cost structures. We will have to take all the factors into consideration.'' The strategic fit may be there, but for IOC, the Baroda petrochem unit just doesn't make business sense. Already IOC's officers' association feels that the plant's bloated labour force, obsolete technology, and sub-scale capacity, will prove a drag on IOC. What's more, at a larger level, IOC's intent to diversify into petrochemicals itself doesn't make much sense. Perhaps realising this, it has gone slow on the Rs 4,228-crore paraxylene/PTA project at the Panipat refinery. And with the oil sector due to be decontrolled by April, 2002-it could even happen this year-IOC would do well to focus on marketing. For, decontrol would call for a whole new mindset. Says Vidyadhar Ginde, Analyst, hsbc: ''IPCL Baroda would make sense for IOC depending on the price at which they get it. The technology is relatively old, the units are sub-scale and over-staffed. IOC would have to take into account the redundancies.'' What makes the whole transaction controversial is the manner in which it is being carried out. Selling loss-making assets of one public sector to another, the entry of IOC into the fray after the dates for submission of bids lapsed, and the fact that anyone who bags the residual IPCL will benefit immensely. IPCL Baroda provides oil majors a captive market for naphtha. Whether it's Reliance or IOC, their margins would increase substantially if they can supply to IPCL Baroda as exporting naphtha is not remunerative.'' But if the Baroda unit does become a part of IOC, the doors of one captive customer are closed for Reliance. The reasons behind this deal lie in the realm of speculation, but what is fairly obvious is that this tinkering-what else would you call the sale of one inefficient PSU unit to another-is an effort to make IPCL look more attractive in the disinvestment beauty parade. Although a host of companies had evinced interest (including Dow Chemicals, Exxon, and Sabic Chemicals), only three submitted their bids, and of these one (Mitsubishi) dropped out subsequently. IOC came in late, and so had to ally with the Chatterjee Group. The biggest questionmark hanging over the deal is the price at which IPCL is willing to part with the Baroda unit. Given all the ills that come with it, the protests from within, and the fact that Pathan wouldn't like to cut a bad deal when he's just a year away from retirement, the price tag shouldn't be too large. |
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If all
goes well, it could be a win-win proposition: the state-owned Indian
Petrochemicals Ltd (IPCL) sells its Baroda petrochem unit to another
government company, Indian Oil Corporation (IOC). Bidders from the private
sector are now enchanted by IPCL as it has got rid of what they perceive
to be the ugly duckling in the company. The government is happy that it
can now get a better price for IPCL; the bidders are happy because IPCL
looks more attractive now; IOC is happy because it can exploit the
synergies that exist with the Baroda unit; and all the parties concerned
can live happily ever after.