Analysis: Can Reliance Rely On The Budget Chemistry?

ANALYSIS
Can Reliance Rely On The Budget Chemistry?

India's No. 1 company will have to beat the depressed markets for its products before it can reap any Budgetary benefits.

By Rajeev Dubey

Anil Ambani, Joint MD (left), and Mukesh Ambani, Vice-Chairman, RIL "I have finished off lobbying," Union Finance Minister Yashwant Sinha proclaimed after Budget 99. Strangely, Reliance Industries Ltd (RIL), the country's largest private sector company, didn't bat an eyelid. If the times are changing, so is the petrochemicals giant. While RIL's meteoric rise was fuelled by the ability of its politically-savvy Chairman, Dhirajlal Hirachand Ambani, to manage the external environment, RIL is today, willy-nilly, working overtime to present a professionally-managed, transparent face.

Even so, did Ambani smile after Budget 99? After all, the vertically-integrated behemoth--which manufactures polymers and chemicals, fibres and intermediates, and textiles and readymades--will be impacted by all the Budget-induced changes in the petrochemicals sector, reeling at an all-time low thanks to the Asian economic crisis. While RIL refused to comment, BT analyses the short-run impact of such external factors on the balance-sheet of India's No. 1 company.

Customs Duties

As all of RIL's raw materials are imported, the changes in the Customs duties are bound to have an impact on the company. Budget 99 will have a negative impact on RIL's synthetics fibre and yarn businesses since the duty on its major raw material, naphtha, has gone up marginally. Further, the import duty on Purified Terephthalic Acid (PTA) has come down, which is likely to exert downward pressure on selling-prices.

As far as finished products go--where RIL has, historically, enjoyed high levels of tariff-protection, which are coming down steadily--the company has a mixed record. While the poor health of the petrochemicals sector will affect RIL in the next fiscal, fortunately, Budget 99 has doled out a few benefits for the growing polymers business, which will surely make up for its negative impact on RIL's other businesses.

NAPHTHA. Budget 99's increase in the Customs duty on naphtha--RIL's principal feedstock, accounting for 80 per cent of its raw materials bill--from 4.60 per cent to 5 per cent will add Rs 4.99 crore per annum to its raw material costs. This assumes an average hike of Rs 17.84 per tonne, which the company will be in no position to pass on to its customers since the domestic prices of its finished products--Polyester Filament Yarn (PFY), Polyester Staple Fibre (PSF), and Poly Vinyl Chloride (PVC)--have hit the trough.

Says Jal Irani, 30, Analyst, Jardine Fleming: "The naphtha duty-hike will have a marginally negative impact on the company's net profits." Beginning 1999-2000, RIL will need to import 2.80 million tonnes of naphtha to cater to the expansion of its Purified Terephthalic Acid (PTA) manufacturing capacity from 5.50 lakh tonnes per annum (tpa) to 9.75 lakh tpa, and polyethylene from 1.60 lakh tpa to 3.20 lakh tpa.

PTA. RIL will be worst-hit by the 2.60 per cent import duty reduction on its finished product, pta. Not only is RIL the country's sole producer of PTA, it has recently ramped up its capacity from 5.50 lakh tpa to 9.75 lakh tpa. With international prices still hovering around $375 per tonne, the duty-reduction will reduce the landed PTA price from $536.85 per tonne to $526.20 per tonne--a fall, from RIL's perspective, of Rs 452.31 per tonne ($10.65).

This has already forced RIL to reduce its domestic PTA price by Rs 300 per tonne. Assuming that RIL will have to, eventually, reduce its PTA prices by Rs 452.31 per tonne, on 9.75 lakh tpa, the impact on the bottomline could work out to as much as Rs 44.10 crore a year.

FIBRE INTERMEDIATES. There is a 0.10 per cent reduction in the Customs duty on PSF and PFY. The impact will be minuscule. RIL, the world's sixth-largest PFY-producer, will have to reduce its prices by Rs 36.54 per tonne, (from Rs 52,000 per tonne). Net negative impact: Rs 0.80 crore.

Similarly, the world's fifth-largest PSF-manufacturer will have to reduce the price of its 2.41-lakh tpa PSF output. Net negative impact: Rs 0.69 crore. However, the bad news may turn good since the price-reductions will give a fillip to the demand for synthetics fibres. Agrees O.P. Lohia, 47, Managing Director, Indo Rama Synthetics: "Hopefully, demand will grow at a rapid pace."

POLYMERS. The best news comes from the 3.60 per cent increase in the Customs duty on its second-largest finished product, polymers like polyethylene, PVC, Poly Ethylene Terephthalate (pet), and polypropylene. The duty-hike will allow RIL to raise the prices of these products.

Assuming that RIL will produce polyethylene to its full capacity of 4 lakh tpa (marketshare: 60 per cent), the 3.60 per cent hike in duty will allow it to raise domestic polyethylene prices by Rs 868.27 per tonne, adding Rs 34.73 crore to RIL's bottomline.

With a capacity of 3.57 lakh tpa of polypropylene production per annum, RIL has a domestic marketshare of 71 per cent. Thanks to the 3.60 per cent Customs duty-hike, RIL can increase prices by Rs 655 per tonne. At the current production of 3.57 lakh tpa, RIL stands to gain Rs 23.38 crore. And assuming a 7.57-lakh tpa capacity--including the new 4-lakh tpa facility at Patalganga (Maharashtra)--the bottomline will go up by an additional Rs 26.20 crore.

With a marketshare of 42 per cent and annual production of 2.70 lakh tpa, RIL is India's largest PVC-manufacturer. Thus, the 3.60 per cent duty-hike will allow the company to increase its prices by Rs 629.62 per tonne. Net gain: Rs 16.99 crore.

Finally, RIL is the country's largest pet-manufacturer, with a production capacity of 80,000 tpa. Assuming that it will manufacture only around 18,800 tpa (as per 1997-98 figures), it can pocket Rs 1.77 crore if it raises prices by Rs 939.35 per tonne. Running at a full capacity of 80,000 tpa, the net advantage will be Rs 7.51 crore.

Excise Duties

As RIL imports most of its raw materials, the excise duty changes on its principal raw materials--naphtha, paraxylene, and kerosene--will not have any impact on the company. However, the excise duty changes on its finished products--PTA (down 2 per cent), PFY (down 0.90 per cent), PSF (down 2.30 per cent), and polymers (down 1 per cent)--will spur demand because of lower domestic prices, but will not directly benefit the company's bottomline.

That's because the reductions will be passed on to the consumers due to the over-supply situation in these segments. In fact, since Budget 99 has cut down the differential in the excise duty between synthetics and cotton yarns, the demand for PSF and PFY may go up in the next fiscal. In the final analysis, RIL will be a net gainer from Budget 99. For, the net loss of Rs 50.58 crore will be outstripped by the net gain of Rs 108.91 crore. Says Manish Nigam, 28, Vice-President (Asian Equities), Credit Suisse First Boston: "The Budget will have a positive impact of between 1 and 2 per cent of PBT (Profits Before Tax) on RIL's bottomline."

According to BT's estimates, due to the duty changes, RIL's net profits for 1997-98 of Rs 1,652.67 crore will be bolstered by an additional Rs 58.33 crore. Of course, the 10 per cent surcharge on corporate tax will have a mild negative impact (Rs 6.30 crore based on 1997-98 prices) on its PBT of Rs 1,715.67 crore. Moreover, with the petrochemicals cycle at its nadir, RIL will, obviously, gain from any revival in international prices. In that sense, reliance on Budget 99 will bring good news for RIL.

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