Downturn in plastics unlikely to dent earnings
FE NEWS SERVICE
Reliance Industries LimitedCurrent Price: Rs 154
52 Week High/Low: Rs 222/91
Recommended At: Rs 150;
Reco: Outperformer The share of plastics in RlL's total revenues will increase from 35 per cent in Fiscal 1997 to 44 per cent in Fiscal 1998 with the commissioning of the 750,000 tpa ethylene cracker. RIL is well positioned to manage the downturn in plastics and its impact on earnings. Fibres are estimated to be 38 per cent of its turnover in FISCAL 1999. The depreciation of rupee hasn't benefitted the domestic polymer producers. With prices at the Oct 97 level, landed prices are 7-8 per cent higher than the domestic prices. The reversal has been caused mainly by the sharp downturn in domestic demand. VALUATION: The scrip has performed with the market RIL is available at a PER of 10.1 X and 8.1 X its FISCAL 1998 and FISCAL 1999 earnings respectively, a 20-22 per cent discount to the market. Its strong growth and No.l position in most of its product
streams had given it a premium over IPCL. More important, RIL has demonstrated its ability to combat cyclical price movements through additional volumes and cost cutting. The scrip's performance has more or less been in line with the Sensex's in the last four years. It could not outperform the market because of oversupply and the downturn in the polyester chain, rising feedstock prices for polymers and apprehension caused by the delay in commissioning the cracker. We believe that the downturn in polyester has bottomed out, and with the commissioning of the cracker, it now has access to the required feedstock for polymers. We expect RIL to outperform the Sensex in the long run, given the fact that its earnings growth will outstrip the Sensex's even in the cycle trough. FUTURE PROSPECTS: Integration has given it an edge In FISCAL 1998, growth will come from capacity additions made in FISCAL 1997, including the 750,000 tpa ethylene cracker and related polyethylene and polyproplene units. The remainingunits in Hazira 11, including 120,000 tpa of MEG and 350,000 tpa of PTA will be commissioned by end CY99. RIL is constructing a Rs 50,000 mn complex in Jamnagar, which includes 1,400,000 tpa paraxylene and PTA units. A cut of 5 per cent in customs duty is expected in downstream polymers, in line with the Chelliah committee recommendations. However, the rupee is expected to depreciate by another 10-12 per cent by FISCAL 192000. The current economic crisis in the Asia-pacific region will keep polymer prices including countries like South Korea, Taiwan, Indonesia, Thailand is expected to slacken the regional demand for polymer. This could lead to short term surpluses and consequent weakening of prices. However, in the longer run this crisis would itself put a cap on the vigorous capacity addition in these regions. Considering a 20 per cent drop in international prices, there will be a net impact of only 5-7 per cent on landed prices, which is marginal. The same is the case in fibres where only a 5 per cent
reduction in customs duties is foreseen. Given the volatile earnings of commodity and cyclical stocks, they trade at a discount to the market. However, we believe that RIL has demonstrated its ability to effectively combat a cyclical downturn with a rise in volumes. A cycle trough valuation of 8. lX its FISCAL 1999 earnings, when the total capacity would be almost four times the present, appears cheap. RIL has become a truly integrated player in both, fibres and polymers. -- Lloyds Securities
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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