Reliance, Gail, IOC’s petchem margins to remain suppressed, says Prabhudas Lilladher; downgrades RIL | Mint
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Business News/ Markets / Stock Markets/  Reliance, Gail, IOC’s petchem margins to remain suppressed, says Prabhudas Lilladher; downgrades RIL
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Reliance, Gail, IOC’s petchem margins to remain suppressed, says Prabhudas Lilladher; downgrades RIL

Petchem margins have been suppressed since the beginning of 2023 and analysts expect Reliance Industries (RIL), GAIL India and Indian Oil Corporation’s petchem margins to remain weak going into 2024 too, on the back of production capacities exceeding demand.

China, the world’s largest producer and consumer of petrochemicals has been adding new petchem capacities and improving its self sufficiency. (Photo: Bloomberg)Premium
China, the world’s largest producer and consumer of petrochemicals has been adding new petchem capacities and improving its self sufficiency. (Photo: Bloomberg)

Reliance Industries Ltd (RIL), GAIL India and Indian Oil Corporation Ltd (IOCL) among the oil & gas sector companies are likely to see their petrochemical margins remaining under pressure on the back of increasing capacities by Chinese refiners, analysts said.

Chinese refiners have been increasing their petrochemical capacities to diversify from transportation fuels like petrol and diesel and reduce dependency on imports.

The world’s largest producer and consumer of petrochemicals, China has been adding new petchem capacities and improving its self sufficiency. About 1.4 mmt of new polyethylene (PE) capacities (most of which are for HDPE) are expected to come online in 2023, up 8.5% YoY, brokerage firm Prabhudas Lilladher said.

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China’s net imports of polypropylene (PP) have fallen from 26.7% in 2013 to a mere 10.7% in 2023. HDPE imports have halved from 52% to 25.4% during the same period. LDPE and LLDPE imports have declined from 56.7% and 44.6% in 2019 to 48.3% and 35.4%in 2023, respectively. 

Thus, China has reduced its reliance on imports. Along with this, demand concerns too persist in Europe on the back of high inflation and interest rates. This has led to suppressed product margins, the brokerage firm noted.

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Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt believes these macro developments are likely to impact the Indian petrochemical sector. Petchem margins have been suppressed since the beginning of 2023 and he expects Reliance Industries (RIL), GAIL India and Indian Oil Corporation’s petchem margins to remain weak going into 2024 too, on the back of production capacities exceeding demand.

“Increase in capacities would lead to supply glut, amidst lack of commensurate global demand. We expect RIL, GAIL India and Indian Oil Corporation’s petrochemical margins to remain suppressed in the near to medium term," Bhushan said

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The brokerage firm downgraded its rating on Reliance Industries to ‘Accumulate’ from ‘Buy’ with SOTP based unchanged target price of 2,618 per share. It values RIL’s standalone business at 7.5x FY26 EV/EBITDA, Jio at 15x FY26 EV/EBITDA and Retail at 37x FY26 EV/EBITDA. 

The brokerage maintained a ‘Buy’ call on GAIL India, driven by strong transmission and trading segments and raised the target price to 151 per share from 139 earlier. 

For IOCL, it maintained a ‘Hold’ rating with an unchanged target price of 94 per share.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 24 Nov 2023, 01:01 PM IST
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