RIL’s Hualon buy well-timed: analysts

RIL’s Hualon buy well-timed: analysts
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First Published: Tue, Sep 11 2007. 01 42 AM IST

Updated: Tue, Sep 11 2007. 01 42 AM IST
India’s largest company, energy and petrochemicals giant Reliance Industries Ltd, or RIL, has increased its yarn capacity by one fourth and inherited a large customer base for fabric by buying the assets of Hualon Corp. Sdn. Bhd., Malaysia’s largest polyester maker, which has been in receivership for nearly a year.
The terms of the buyout were not disclosed but analysts estimated that RIL was paying between $150 million and $250 million (Rs609-1,015 crore) for the acquisition.
RIL acquired the assets from Ernst & Young, an audit firm that was appointed receiver in November 2006, after Hualon failed to clear debts that trade publication Platts estimated at 4 billion Malaysian ringgits or Rs4,752 crore.
On Monday, Mumbai-based RIL, headed by billionaire Mukesh Ambani, said in a statement that the acquisition would add half a million tonnes of annual capacity and increase the group’s revenues by $1 billion.
Expected addition to profits were not disclosed but an RIL executive said the company expected the acquisition to add to the earnings per share in the long term.
RIL shares moved up on the Bombay Stock Exchange by Rs25.80 or 1.32% to close at Rs1,987 each, close to its year-high of Rs1,999.30. Its 52-week low is Rs1,075.20.
“The integrated assets of Hualon will help RIL to strengthen its position in the entire textile value chain and RIL will graduate to become a solution provider to the global textile industry,” chairman Ambani said in the statement.
The acquisition, said the RIL executive, complements the acquirer’s polyester business as the Malaysian company makes both polyester fibre and textiles, apart from selling to a large number of global retailers.
“With this acquisition, we get a profitable last-mile polyester business,” the executive said.
Besides buyers in China, Hong Kong, South Korea, Bangladesh and Singapore, Hualon—a unit of Taiwan-based Hualon Corp. that has interests in real estate, insurance and finance, electronics, and aerospace—exports to the US, Europe, Australia, Iran, Syria, Turkey and Vietnam. The Reliance executive did not wish to be identified.
Hualon, an integrated manufacturer of polyester fibre and textiles, has 250,000 spindles for yarn manufacture and 5,800 shuttleless looms for weaving. This will give RIL, which is already the world’s largest polyester maker, around 7% of the global polyester yarn and fibre market, up from 5% today. RIL can also use its own purified terephthalic acid—a key input in petrochemicals and yarn-making—production line (the company produces a surplus of this), to feed into the Malaysian firm’s factories.
Hualon reported a turnover of $800 million for the year to December 2006, which RIL expects to grow by 25% this year to $1 billion. The acquisition was the largest foreign direct investment into Malaysia since the Asian currency meltdown of 1998, the RIL executive said. Hualon has manufacturing facilities spread over two locations in Malaysia—Nilai and Melaka.
The RIL buy is timed well in polyester yarn, an industry characterized by business cycles, said one analyst. Macquarie Bank Ltd’s chemicals and polymer analyst Jal Irani said in a post-deal report that integrated  polyester margins, which are near all-time lows, could rebound from current levels given the strong predictions of rising price of the competing  fibre, cotton, in the next two years. “We believe that the high cotton prices will boost polyester margins due to a high positive correlation between cotton prices and polyester margins. Hence, it is a very well-timed acquisition as the enhanced  capacity will give greater leverage post the turnaround in polyester cycle,” Irani wrote.
Addition to petrochemical capacities in West Asia and China has been delayed until 2012 and this, too, will help RIL consolidate its polyester business, Rohit Nagraj, research analyst at Angel Broking, a Mumbai brokerage, said.
In March, RIL agreed to buy all the shares it doesn’t own in Indian Petrochemical Corp. Ltd, aiming to consolidate chemicals manufacturing in one company. Global polyester demand has been growing by around 6% annually in the last 10 years and is expected to grow faster—about 10%—in the coming years. The company said on Monday that it posted a net profit of Rs11,943 crore on sales of Rs1.2 trillion in 2006-07.
Monday’s buy is RIL’s second acquisition of an international polyester manufacturer; it bought Trevira GmbH of Germany in 2004 for €80 million (equivalent to Rs440 crore then). Last week, the acquirer also announced it was buying East Africa’s largest oil retailer, GAPCO, for an undisclosed sum.
gayatri.r@livemint.com
Bloomberg’s Manash Goswami and Pratik Parija and PTI contributed to this story.
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First Published: Tue, Sep 11 2007. 01 42 AM IST