One of the world's lowest cost producers of petrochemicals, Sabic (Saudi Basic Industries Corporation) has decided to enter into joint ventures in India in chemicals, plastics and fertilisers. The company has been in India for a decade but has so far restricted itself to marketing of products produced in Saudi Arabia. It now plans to get into manufacturing in India. In the first phase the company is setting up a joint venture in the polystyrene business and an R&D centre in India. The R&D department is being set up to build up market demand for new products, by providing technical help to customers, and also to develop products for India.

Globally, polystyrene business has done badly, but in India the market is growing at 13 per cent. In India there are two players in the polystyrene business -- Supreme Petrochemicals and LG-Chemicals. Supreme Petrochemicals has been making net losses for the past couple of years but at the same time is increasing turnover from 80,000 tonnes to 1,20,000 tonnes. The company has been making loses as styrene is not produced in India and the margins are not enough to cover the depreciation and the interest payments. The LG- Chemicals unit, producing styrene has a cost advantage as it is fully depreciated.

Sabic's joint venture shows a change of attitude of the company towards the Indian market. Currently, sales in India account only for 6 per cent of the company's turnover across the globe. But after China, India is one market where there could be a growth rate upwards of 25 per cent in almost all the products manufactured by Sabic.

In spite of being one of the lowest cost producers of polymers in the world, Sabic has maintained a low profile. The company had introduced LLDPE in Indian markets, but after the building up of huge capacities by Reliance and IPCL, the company caters only to the excess demand, which cannot be met by local players.

Sabic's main advantage is its feedstock is free, as gas in any case is produced along with the oil. Moreover, the size of their cracker is six times that of Reliance Industries. For Reliance, 30 per cent of the total raw material cost or 9 per cent of the total cost is the cost of the feedstock. With their size and cost advantage, therefore, Sabic can flood and capture the polymers market by playing on the price. So far, the company has avoided getting into any kind of price war with local players, and the Sabic management claims that they would only match the international price.

The decision to enter into joint venture in India could be because the cost differentials of excise and imports along with the poor infrastructure facilities for transport, have been to the company's disadvantage. Sabic has no dealer network in India and so far have been selling directly to it's customer. The present decision would mean that Sabic might be thinking of changing their marketing strategy in the near future.

In the fertiliser segment India has to annually import 10 million tonnes of urea. Sabic has been important supplier, supplying bulk of requirement for both urea and ammonia. The investments in fertiliser sector would definitely bridge the gap, which is slated to reach 25 million tonnes in year 2000.

On the whole, the entry of Sabic could mean more products introduced in India at lower cost, a move any customer would welcome.

SRF

What does a company do when for the year 1996-97, it posts profits before tax of Rs 15.81 crore courtesy "other income" amounting to Rs 15.71 crore? Float a rights issue! SRF is doing precisely this and to make it attractive for investors, the price has been lowered and will be in the band of Rs 18-21.

SRF has been known to be a cash guzzler and it is unlikely that equity dilution will quench its thirst. Consider the performance. Between 1992-93 and 1996-97, the capital employed by the company jumped five times. The RoIC (return on incremental capital, calculated over a five-year period) works out to be just 0.31 per cent in 1996-97 and in the best year for the company, 1995-96, it works out to be just 6.5 per cent. This does not take into account the change in the method of valuation of inventory by the company which inflated profit by Rs 1.18 crore. The management has also extended the assurance of buy-back, as and when permitted. But the company may not be able to afford it, given its cashflow problems. The management also intends to lower the debt-equity ratio from 2.25:1 to 1:1. The reason given is the expensive debt that it has amassed. Post-tax cost of debt works out to be 12 per cent. What is strange is that the cost of funds is being proposed to be reduced by diluting equity, which is more expensive than debt. The equity dilution will be to the tune of Rs 80 crore. How the equity will be serviced is anybody's guess. With the major revenue earner for the company-investments-being sold off, the profitability of the company will be hit.

The question is from where will the subscription come? SRF is on safe ground on this issue. Financial institutions hold 42 per cent stake in the company and will most probably subscribe to their portion. The purpose of the issue is "financial restructuring" or repaying loans. Why shouldn't the FIs subscribe to the issue if they can get more money than the amount they have to subscribe as their share? In any case, they are heavily committed to SRF by way of loans advanced. But while the FIs may have good reason to support the SRF rights issue, the ordinary investor has none.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.