One of the country’s leading petroleum products retailers Hindustan Petroleum Corp. Ltd (HPCL) plans to enter the petrochemicals business by acquiring a “strategic stake" in Andhra Petrochemicals Ltd (APL), according to an executive at APL. If it were to happen, the acquisition would make logical sense for HPCL because it will reduce the company’s dependence on the refining and fuel retailing business.

For a smoother ride: An HPCL petrol pump in New Delhi. The firm plans to enter the petrochemicals sector. Madhu Kapparath / Mint

“They (HPCL) are looking for a strategic alliance and this is at a preliminary stage. Only the data is collected (through due diligence) and nothing is through yet," said V.N. Rao, chief executive and chief operating officer, APL. He added that HPCL could buy some stake in the company.

O.P. Pradhan, executive director, corporate planning and strategy at HPCL, declined to comment on the issue.

“It is basically a vertical integration for the refinery companies to get into petrochemical business," said Sanjeev Prasad, co-head institutional equities and head of research chemicals, energy, media, telecom at Kotak Securities Ltd, a Mumbai-based brokerage.

According to another analyst, who did not wish to be identified, the petrochemicals business has a margin of $400-600 (Rs15,720-23,580) per tonne while the refining business has a margin of $5-15 per barrel.

The state-owned HPCL has a 9.24 million metric tonne per annum (mmtpa) capacity refinery in Visakhapatnam and it already supplies naphtha to APL’s petrochemical plant in the same city.

It has another refinery in Mumbai; together the two refineries have a total capacity of 16.66mmtpa, which translates into a 12% share in the domestic refining capacity of the country.

Naphtha is one of the products of refineries apart from petrol, diesel and kerosene.

At Friday’s close of Rs32.8 a share, APL has the market capitalization of Rs278.81 crore. Andhra Pradesh Industrial Development Corp. and Andhra Sugar Ltd hold 10.8% and 28.18% stake in the company, respectively. The company ended 2006-07 with revenues of Rs266.10 crore and a net profit of Rs36.35 crore. It produced 42,408 metric tonne of oxo alcohols, a petrochemical in 2006-07.

HPCL ended 2006-07 with a net sales of Rs89,724 crore and a net profit of Rs1,571 crore.

Rao said there was “no question of present promoters divesting" their entire holding in APL.

He said there has been no decision on whether HPCL would acquire a minority or majority stake. “Options could be anything, but as of now nothing has been finalized either way."

Shares of APL dropped 8.76% to Rs32.80 on the Bombay Exchange on Friday on a day the exchange’s benchmark index plunged 3.49%. The shares hit their 52-week high of Rs42.80 on 7 January.

HPCL shares lost 5.74% to Rs310.95 on Friday.