Mumbai: The petrochemicals business of Reliance Industries Ltd (RIL) will significantly benefit from the government’s decision on Friday of raising the import duty on polymer products to 7.5% from 5%.
Polymers, used as a key input in sectors as diverse as automobiles, mining and steel, contribute 44% to RIL’s petrochemicals revenue, according to a 10 May report by Goldman Sachs. Revenue from the petrochemicals business accounts for around 24% of the firm’s total revenue.
“The hike in duty will lead to an increase in the import-parity price of these (polymer) products, helping revenues of the producers but increasing costs for the downstream converters,” the foreign brokerage said.
RIL is best suited to take advantage of the situation since it is expanding capacity in this regard, UBS said in a 10 May report.
“We expect RIL to benefit from increased domestic realization based on its dominant 62% polymer production share,” said the UBS report by analyst Ashish Jagnani.
The brokerage forecast domestic demand for polymers to grow by 10% and RIL to have a significant share of the market owing to the $8 billion (around Rs.43,840 crore) petrochemicals capacity expansion plan that the firm is expected to complete by 2015-16.
The conglomerate has a domestic market share of 41% in the polymer industry, according to its 2012-13 annual report.
The government’s decision would have a positive impact of 3.2% on RIL’s earnings per share (EPS), said the Goldman Sachs report by analysts Nilesh Banerjee, Vikas S. Jain and Siddharth Raizada.
“With polymers contributing 37% of RIL’s petrochemicals Ebit (earnings before interest and tax), we believe the hike will increase earnings (by) 2%, which would be positive for the share price,” the analysts said.
RIL declined to comment.
Its petrochemicals segment came under some pressure in the quarter ended 31 March because of lower margins across the polyester chain. The UBS report estimates that the resultant growth in the polymer business will help offset some of this weakness.
For the year ended 31 March, the petrochemicals business generated a revenue of Rs.88,108 crore for RIL, up 9.3% from a year earlier. Operating profit from the segment fell 18.3% to Rs.7,328 crore. Operating profit margin narrowed to 8.3% from 11.1%.
The duty increase affected by the government was probably a response to the long-standing demand from domestic polymer producers for some duty protection against heavy exports into the country, according to the Goldman Sachs report.
“While this is the first increase after years of decrease in polymer import duties, we note with this increase, the India polymer duty structure is back in the broad range of 6-8% in Asia.”