A good scorecard

28 July 2003 00:00  [Source: ACN]

It is not yet a perfect report card, but Indian Petrochemicals Corp Ltd (IPCL) has certainly seen its grade move up by a few notches after its acquisition by Reliance Industries just over a year ago this week.

The gains are visible. Financial performance improved drastically after the acquisition: the company posted a 90.6% increase in net profit to Rs2.04bn (US$44m) in the financial year ended 31 March 2003, compared with 2001-02, due largely to higher production and sales as well as better operating margins. Turnover rose by 5% to Rs57.98bn.

And the company's share price climbed from a low of Rs35/share in Q3 of the calendar year 2002 to Rs130/share in mid-July, with investors confident that more improvements to the bottom line are likely to be seen this financial year.

For Reliance, the IPCL acquisition has helped it better integrate its refinery and petrochemical operations, besides giving it an average 80% share of the domestic petrochemical market.

But issues related to market domination that had surfaced at the time of the acquisition still persist as high petrochemical tariffs continue to limit the participation of foreign companies in the domestic market.

Besides Reliance, there are only two other major Indian producers - Gail India and Haldia Petrochemicals Ltd (HPL).

While concerns linger in the minds of petrochemical buyers, analysts have given their thumbs-up to the acquisition.

'The perception in the financial community is that any company in the Reliance fold will be better managed. Costs will be kept under control and capacities will be better utilised,' says an industry analyst.

In the financial year 2002-03, production at IPCL's three petrochemical complexes rose by 18% to 4.4m tonne compared with 2001-02.

Interest costs dropped by 22% to US$62m, as IPCL was able to use Reliance's higher credit rating to refinance high-cost debt.

IPCL's energy index dropped by about 10% to 3.76m KCal/tonne of product from 4.17m KCal/tonne in the previous year.

Following the acquisition, IPCL has been using all internally available low-value hydrocarbons as feedstock or fuel, thereby reducing external purchases.

An industry source points out that financial management at IPCL has improved significantly since the acquisition. Reliance's major strength is in managing finances, which gives it an edge over other companies, adds the source.

The two companies have also merged their domestic marketing and distribution networks successfully. That has also helped lower costs.

While the focus at IPCL last year was on bringing down interest costs and boosting production, the emphasis this year is on bringing manpower numbers and other costs under control. IPCL had over 13 000 employees at the time of its acquisition, with manpower costs accounting for 7% of its turnover.

So far this year, around 1550 employees, mainly from the marketing and finance departments, have opted for voluntary retirement. Another 170 workers were sacked for extended absence from work.

And the company is likely to launch a second scheme for voluntary retirement later this year.

At the time of the acquisition, doubts were raised on whether Reliance would be able to reduce the number of employees at IPCL. Strong labour unions were expected to resist any moves to trim the workforce.

'The earlier management would have found it difficult to push through a voluntary retirement scheme. But the recent reductions did not evoke strong protests from the unions. Reliance has a good track record when it comes to labour. And its skill in dealing with unions appears to have worked well at IPCL,' points out the analyst.

Another target this year is to further increase production at IPCL's various plants. Debottlenecking of various plants has been planned.

The capacity of the Baroda cracker is set to rise to 200 000 tonne/year by 31 March 2004 after some minor modifications.

The cracker's capacity was 130 000 tonne/ year at the time of the acquisition. But IPCL was able to produce over 150 000 tonne of C2s in 2002-03.

Among other major expansions lined up for this year and 2004 is an increase in butadiene capacity at Baroda to 75 000 tonne/ year from 50 000 tonne/year, and an expansion of a 30 000 tonne/year polybutadiene rubber plant to 55 000 tonne/year.

Benzene capacity at Baroda is due to be boosted by 50% to 60 000 tonne, while capacities of the 30 000 tonne/year acrylonitrile and 130 000 tonne/year PP plants at the same site will go up by 15%.

Only one greenfield project has been identified so far - a 200 000 tonne/year PVC plant at Dahej, Gandhar, in Gujarat, where IPCL operates a gas cracker. India is currently running short of PVC, so a new plant makes perfect sense.

The project would also see the expansion of ethylene dichloride and VCM plants at the same site. Chlorine would be sourced from Gujarat Alkalies and Chemicals Ltd's chlor-alkali facility in Gandhar.

The benefits of the IPCL acquisition to Reliance cannot be easily quantified. But feedstock integration has been a major plus.

Reliance's refinery at Jamnagar in Gujarat, India, now meets the full naphtha requirement of IPCL's cracker at Baroda. Previously, IPCL relied on imports or supplies from Indian Oil Corp.

The two companies are establishing close links for other raw materials too. For instance, Reliance will meet IPCL's increased requirement of crude C4s from its Hazira cracker once IPCL expands its butadiene capacity.

A proposal was also floated earlier this year for a tolling arrangement involving IPCL's Baroda complex. This would see Reliance supplying naphtha and other raw materials to IPCL. The final product would then be marketed by Reliance, which would also pay a conversion fee to IPCL.

The arrangement would result in considerable cost savings. However, legal and technical complications have delayed its implementation.

Certainly, the financial community and the two companies have reasons to be cheerful about the progress made during the last year. But petrochemical buyers remain concerned about Reliance's enormous clout in the marketplace.

Reliance's acquisition of IPCL and the closure of National Organic Chemicals Ltd last year mean that there are fewer purchasing options for Indian petrochemical buyers.

In PE and PP, besides the IPCL-Reliance combine, buyers can source from Gail or HPL or import the materials. In purified terephthalic acid (PTA) and monoethylene glycol (MEG), India has only two producers, including Reliance-IPCL.

Together with IPCL, Reliance accounts for 85% of India's PP capacity, 93% of MEG, and 53% of PE.

'Except for PE, Reliance can be aggressive on pricing of other polymers as it is by far the largest supplier in India,' points out an industry source.

'There is certainly resentment at the ground level. Most are unhappy. But customers know they can't do anything about it,' says a second industry source.

The problem is that most consumers cannot afford not to buy from Reliance, given its dominant position in the Indian market. This is especially true for large buyers; only the smaller ones that need one or two containers every month can rely on other domestic producers or on imports.

The government had in the past allayed concerns of market dominance by pointing to competition from international players.

Many of the global majors have built up a presence in the country, but they have been handicapped to some extent, as local producers usually set prices slightly below the landed cost of the product.

'The aim of the game is to keep foreign suppliers out of the Indian market,' says the second source.

And there is little that buyers can do as long as import duties remain at current levels. Polymer imports currently attract a basic duty of 25%. Although the Indian government is committed to bringing down tariffs to 5-10%, when this will happen remains uncertain.

Some market observers say they have noticed more frequent Reliance price changes, often 2-3 times in a month, during the past year. But this could always be interpreted as a company that is responding quickly to developments in the international market.

Reliance's position in the Indian petrochemicals market is set to grow even stronger in the next five years after it completes a range of new projects that were announced in June (ACN 23 June, p5).

On the cards is a 550 000 tone/year styrene plant which would make the company India's only styrene producer.

Reliance's capacity share in MEG and PP will also spiral. The company said PP capacity would be hiked by 40% to 1.4m tonne/year, while MEG capacity would be raised by 39% to 500 000 tonne/year.

The styrene project is likely to be located in Jamnagar. Reliance is said to be evaluating several technologies for extracting dilute ethylene from its fluid-catalytic-cracking unit in Jamnagar.

The PP project would also be based in Jamnagar, and would be linked to a planned refinery expansion that would yield extra C3s.

The MEG project is likely to be at Hazira in Gujarat or at IPCL's Gandhar site.

Other projects include 220 000 tonne/year of PET and an increase in paraxylene, orthoxylene and PTA capacities.

While there is little for Reliance to worry about on the petrochemicals front, the problems with its telecommunications business are far from over. Reliance Industries has invested US$1bn in this business to date. It has a 45% share in Reliance Infocomm.

Reliance Infocomm has in the past few months overcome some of the teething problems associated with its CDMA-based service (ACN 5 May, p11) but the battle for market share with India's GSM cellular operators is far from over.

The latest offer by Reliance Infocomm is a low-price service that offers a mobile phone connection at as low as Rs501 but with a string of clauses.

The offer has encountered overwhelming consumer response. But competitors have followed suit, making it difficult to predict whether Reliance Infocomm will eventually emerge a winner in the cellular-phone market. But some analysts are now more optimistic about the company's fortunes.

'Their marketing strategy is looking much better now. And customers are queuing up. The issue is profitability. Their focus so far has been to capture markets first and worry about profits later,' says an analyst.

Returning to petrochemicals and the IPCL acquisition, the Indian government is due to offload the rest of its 34% stake in IPCL soon. According to the shareholders' agreement between Reliance and the Indian government which was reached last year, Reliance has the first right of refusal for this stake.

The Indian media have reported that the government is averse to the idea of selling the rest of its share to Reliance, as this would push up the company's holding in the company to 80%. Such a high shareholding would make it easy for Reliance to merge IPCL with itself.

Industry sources add that Reliance will not buy the whole of the 34% as it already has management control with its 46% share. 'Reliance may at the most be interested in pushing its shareholding to 51%,' says the first source.

The government is expected to launch a public offering in the domestic and international markets in the next six months.

The government could also offer a portion of its shareholding to IPCL employees, though details have yet to be finalised, says a source close to the company.

As for a full merger of IPCL with Reliance, opinion remains divided. Some industry sources believe there is no need for one. 'IPCL has no unabsorbed losses, which would make a merger beneficial,' says the analyst.

At the same time, going by Reliance's past track record of gradually bringing group companies into its fold, other industry players are unwilling to rule out the possibility completely.

The two companies are gradually strengthening their ties, and Reliance's style of working is increasingly being adopted in IPCL. For many in the industry, the two are already one, except in name.

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