Reliance Industries will benefit anywhere between Rs 22 crore and Rs 160 crore from the measures announced by finance minister P Chidambaram in the 1997-98 budget yesterday.
Some of the measures like the cut in polyester filament yarn excise duty by 10 per cent will have an immediate impact on prices. Reliance will benefit by Rs 7 per kg of PFY, which it may choose to either pass on or retain fully.
Assuming it retains the full benefit, savings will be Rs 154 crore from the 10 per cent cut in excise duty. If they save just Rs 3 per kg and pass on Rs 4 per kg, Reliance will save Rs 66 crore.
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But, if they just retain just Re 1 per kg and decide to cut PFY price by Rs 6 per kg, Reliance will end up saving Rs 22 crore.
Reliance will also save on MAT (minimum alternate tax), which has been cut from 12.9 per cent to 10.5 per cent.
But the 10 per cent tax on dividend pay-out will dampen sentiment and partly neutralise some benefits.
Calculations show the 2.4 per cent cut in MAT will lead to benefit of Rs 33.47 crore savings for the company based on 1995-96 figures.
Of this, the company will have to pay 27.5 crore as the 10 per cent tax on dividend. This leaves actual benefit of only Rs six crore.
Analysts say the overall impact on Reliance is positive, though on MAT, things are still unclear
"The company has a number of options. It can export more and further reduce MAT, lower dividend pay-outs and pay less tax," say analysts.
The excise duty cut will restore margins somewhat under pressure for some time due to falling prices and high input costs. Thanks to its large volumes, Reliance can drop prices further and spur volume growth.
Ever since PFY duty started coming down since 1995-96, prices have been falling and volumes growing. PFY prices two years back was over Rs 150 per kg. Today, it is less than Rs 100 per kg.
With yesterday's excise cut, demand, already at over 15 per cent is expected to grow further in the industry.
LAB (linear alkyl benzene) import duty has been cut from 30 to 20 per cent, and this will impact margins slightly. But this is the only negative point. Reliance is expected to benefit immensely from the reduction in import duty on capital goods, which has been cut from 25 to 20 per cent.
Reliance Industries has huge capital expansion plans on its hand of over Rs 5,000 crore in its polyester and petrochemical industry.
The company also plans to build a 1.4 million tonne paraxylene plant at Jamnagar, Gujarat along with a four lakh tonne polypropylene plant.
In last year's budget, Reliance was adversely affected when import duties across the board were slashed. It had to drop prices of its major polyester and polymer commodities.
It managed to maintain margins and post profits in the first half of 1996-97, partly due to some volume growth.