One of country's biggest research outfits, Kotak Securities, has come out with some interesting, though highly debatable, analysis of Reliance Industries. Its report has projected negative profit growth in 1998-99 for India's largest petrochemical company. The research outfit has pointed out some potential concerns which are worth commenting upon. Similarly, some rethinking is in order on its financial calculations. Among the concerns of the outfit is that Reliance will be affected by increasing capacity in the Asian region, hurting Reliance margins.The report also goes on to mention that "these declines will not only create negative earnings momentum, but will also effect investment sentiment towards the sector". Also, one should not forget that Reliance is an integrated player, it has recently commissioned its gas pipeline from its oil wells in Bombay high. Considering its capacity build up in the petrochemicals sector, it will be Reliance that will be virtually dictating the prices. Petrochemicals prices mostly move in tandem with the prices of feedstock and only during large variations in the supply-demand situation is the contribution band (the difference between the price of final products and inputs) affected. Being an integrated player, Reliance will be sheltered from any fluctuations in feedstock prices.Reliance has implemented the latest technology, so production cost will be low. The firm's power cost is among the industry's lowest at Rs 1.61 per unit, which will fall further with increased reliance on captive power. Following its extensive overseas debt programme, Reliance's cost of funds is lower than that of competitors.

Currently, synthetic fibre is cheaper than cotton, so demand for polyester staple fibre and polyester staple yarn are thus expected to increase substantially.Demand in the plastic industry is likely to overshoot supply at least for the next five years.In LLDPE and PVC, where there will be excess supply, Reliance will have the option of switching between LLDPE and HDPE.As far as PVC is concerned, Reliance is already undercutting most of the players. This has financially hurt some players. The report also goes on to say that Reliance will not be able to achieve high growth rate. In previous years growth was largely due to higher product prices . But in years to come, even if prices remain constant, the company has enough projects lined up to see volume growth till the year 2001. The report says that RIL capitalised 70 per cent of its cash interest expense in fiscal 1997. The relationship between actual interest paid and interest capitalised is difficult to understand. One, interest paid, is a profit and loss account item, while the other, interest capitalised, is a balance sheet item. The report has said that Reliance's interest liability will double next year. But interest should not be looked at in isolation. Interest should be assessed as a ratio of PBIDT/gross interest, since that will reflect the company's capacity of servicing its interest.

Kotak has noted that Reliance is a market performer, but nevertheless has projected negative profit growth. Power cost, technology, cost of funds, economy of scale -- Reliance seems well-prepared for the Asian capacity battle anyway.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.