Search the Internet          Tips  Sites: Finance, Investment

Reliance to cover IPCL cost in 2 years

BS Corporate Bureau

Reliance Industries expects the payback time for the Rs 26.38 billion acquisition of IPCL to be less than two years.

The company acquired the 26 per cent government holding in IPCL for Rs 14.91 billion at Rs 231 per share, and will spend another Rs 10.47 billion for a 20 per cent open offer.

Reliance will save on several factors such as the huge flexibility of feedstock, logistics in distribution and marketing of products, removal of bottlenecks in capacities and optimising plant production. Moreover, IPCL will also introduce Reliance to certain high-grade products, hitherto dominated by the state-owned unit.

A Reliance spokesman declined to comment on all this. "Reliance now has five plants -- IPCL's plants at Baroda, Nagothane and Gandhar and its own at Patalganga and Hazira -- to optimise production. In tandem with IPCL's plants, Reliance will rationalise products to enhance its dominant market position in the polymer market," sources said.

"Reliance will also save on catalysts with IPCL's Catad division. Catalysts are the most expensive ingredients in the manufacture of petrochemicals," the sources added.

According to industry analysts, Reliance will also have substantial pricing power in the domestic market. Although analysts say the payback time for a petrochemical plant could vary between three and 10 years, depending upon the petrochemical cycle at the point of entry, they are of the view that if the timing of entry is right, an acquisition at a premium valuation could be justified.

Analysts add that the company's valuation of IPCL reflects Reliance's confidence in the recovery of the petrochemical cycle.

India is expected to become the third-largest market for petrochemicals after China and the US, with the demand for polymers exceeding 15 per cent, as against the 5 per cent growth witnessed globally. Reliance is expected to ride the petrochemical recovery by monopolising eight or nine products which are in common with IPCL.

Powered by

ALSO READ:
The Divestment Development
The Rediff Budget Special
The Rediff-Business Standard Special
Money