Cracking Up For Growth

A look at the leading players and their plans.

The big daddies of the Indian petrochemicals industry, Reliance Industries Limited (RIL) and the Indian Petrochemicals Corporation Ltd (IPCL) had a bad year in 1996-97. But they are all set to reap the benefits of volume expansion in the coming years. With no volume expansion and very little integration, the other big players, Bombay Dyeing and Nocil, however, are likely to be at the mercy of global commodity price movements. In fact, if the planned expansion at Nocil, the Arvind Mafatlal group company does not materialise, the company will be unable to take advantage of the next petrochemical upcycle. A closer look at these players.

Bombay Dyeing & Manufacturing Company

The Nusli Wadia flagship, the Rs 1,211 crore Bombay Dyeing is the country's largest producer of di-methyl terephthalate, (DMT), a raw material used to make polyester fibre and yarn. Its prospects will depend primarily on global petrochem prices, though an ongoing revamp in the textile division could see it performing well in future. A way out could be to forward or backward integrate into paraxylene and polyester. Plans for manufacturing purified terephthalic acid (PTA) could get unstuck however due to a looming overcapacity in the industry.

The sudden bottoming out of the petrochemicals cycle in mid-1995-96 hit the company badly with margins being squeezed and profits falling. For 1995-96, Bombay Dyeing's net profit rose to Rs 117 crore from Rs 98 crore in 1994-95, a 17 per cent increase. However, in the first half of 1995-96, the company had posted a net profit of Rs 102.7 crore, indicating that its second half profitability was badly affected. And in the second half, it managed to post a profit of just Rs 14 crore.

The poor performance was primarily due to a sudden dip in DMT prices, which fell from a high of Rs 64,000 per tonne in 1995. Today, the prices, inclusive of discounts, are ruling at Rs 30,000 per tonne.

At the same time, Bombay Dyeing's cost of imported paraxylene remained high at over $700 per tonne, while spot prices of paraxylene fell to less than $400 per tonne. Since Bombay Dyeing used to import large quantities at contract rates, its input costs remained high even as product prices fell.

The downslide in the company's fortunes continued in the first half of 1996-97. Gross sales fell to Rs 457 crore against Rs 727 crore in the previous year. Only accounting jugglery enabled it to post a profit of Rs 22.3 crore, which is anyway much lower than the previous year's figure of Rs 102.7 crore. However, the performance is likely to improve in the second half results (still to be declared) as prices both of DMT and paraxylene have stabilised.

Bombay Dyeing is thinking of forward integration into polyester products. It tried to take over Orkay's polyester division for Rs 225 crore, but dropped the move after realising the plant had technical problems.

A proposal for making PTA and paraxylene is also on the cards, but it is still pending with the Karnataka government where the plant is to be located. Company sources say that they are not expecting a speedy clearance.

For the future, the company will continue to be buffetted by volatile fluctuations in international commodity prices.

Indian Petrochemicals Corporation Ltd

The Rs 2,785 crore Indian Petrochemicals Corporation Ltd (IPCL) is all set to take advantage of the next petrochemicals upcycle thanks to its large capacities and established market position.

One of the country's largest petrochemicals companies, IPCL has three plants at Nagothane, Maharashtra, Baroda, Gujarat and Gandhar, also in Gujarat. And like the other big integrated player, Reliance, it produces ethylene, polyethylene and polyvinyl chloride (PVC).

The company is building a third cracker plant in Gandhar, which will be fully operational by December 1998. The complex, costing Rs 3,631 crore, will produce three lakh tonne of ethylene, 2.7 lakh tonne of polyethylene and one lakh tonne of ethylene oxide.

The first phase of the Gandhar plant went on stream this April. The plant

will produce PVC (capacity 1.5 lakh tonne) and caustic soda chlorine (1.3/1.5 lakh tonne). In the second phase, it will produce ethylene and polyethylene.

The company has raised most of the money needed for its projects and is now looking to raise another Rs 6,000 crore to implement various diversifications in the ninth plan period (1997-2002).

This ninth plan programme envisages it entering into the refining sector, either on its own or jointly, and also setting up power plants. Although the government has not yet cleared the proposal, the diversification is expected to help IPCL to consolidate its position further. A refinery would provide captive feedstock of naphtha for the company and enable it to compete effectively with Reliance.

For 1996-97, IPCL posted net sales of

Rs 2,785 crore and a net profit of

Rs 510 crore, a drop from the Rs 604 crore net profit posted last year. Poor petrochemicals prices and a delay in commissioning several plants hit margins and growth, say analysts. For example, the Gandhar first phase was scheduled to be commissioned last year but it started production only around April 1997.

But this first phase is now expected to bring a surge in volumes which will be fully felt in IPCL's performance in 1997-98. In 1998-99 and 1999-2000, IPCL will benefit from the commissioning of the Gandhar phase two project, which includes a three lakh tonne ethylene cracker.

Unlike other petrochemicals companies like Nocil, IPCL has world-scale capacities, a strong management and sound working performance. While Nocil is still searching for a partner to infuse cash to implement its cracker projects, IPCL faces no such difficulties in raising money. Earlier this year, it became the first Indian company to get a higher than sovereign rating for its $175 million convertible bond issue.

However, the company is saddled with poorly performing divisions like DMT and acrylonitrile (ACN). Though it has the largest ACN capacity of 70,000 tonne, the business has been hit by the downturn in the acrylic fibre industry.

The DMT industry is also doing badly, though unlike Bombay Dyeing, IPCL produces its own raw material, paraxylene. The slide in DMT prices has meant poor margins for IPCL. In fact, the poor performance of the DMT division was one of the reasons for the drag on IPCL's bottomline in 1996-97.

National Organic Chemical Industries Limited

Ever since Royal Dutch Shell pulled out of the joint venture in 1993, the Arvind Mafatlal group's National Organic Chemical Industries Limited (Nocil) has been struggling to implement its over Rs 4,500 crore cracker project.

It chalked out an ambitious plan in 1994-95 of raising equity to part-finance the project, but it had to be shelved due to the poor capital market conditions. It is now trying to raise money by selling part of the promoters' stake in the project to a foreign company, either Dow Chemicals or Royal Dutch Shell again.

Even if such a plan materialises, Nocil will still find itself struggling to catch up with the other big players. In the four years since Shell pulled out of Nocil, the petrochemicals industry has grown and expanded with a host of new players like Gas Authority of India and Haldia Petrochemicals entering the sector. RIL and IPCL have both put up new large-sized projects. Gas Authority of India Ltd (Gail) has a cracker coming up at Auriya, Uttar Pradesh, next year and Haldia Petrochemicals will become operational by the year 2000.

Nocil will have to put up its project in double-quick time to not only stay afloat but also reap whatever gains are possible from the petrochemicals upcycle, expected by the turn of the century.

Reliance Industries Limited

The country's second largest private sector company, the Rs 8,730 crore Reliance Industries Limited (RIL), had a relatively bad year in 1996-97. Poor prices put the brakes on growth and net profit grew only marginally by one per cent against an over 20 per cent growth in 1995-96.

Even so, RIL is set to further consolidate its position as one of the largest petrochemicals players in the country. It recently completed commissioning its Rs 9,000 crore petrochemicals complex at Hazira. The complex produces 7.5 lakh tonne of ethylene, two lakh tonne of polyethylene, 3.5 lakh tonne of polypropylene, 2.65 lakh tonne of propylene and 3.5 lakh tonne of PTA. With this, RIL's total production has jumped from 1.5 million tonne to six million tonne.

For 1996-97, the company's sales

touched Rs 8,730 crore, a 12 per cent jump from the Rs 7,786.3 crore posted last year. Operating income also rose by 12 per cent to Rs 1,658.2 crore from Rs 1,480.1 crore in 1995-96. Interest costs went up by 54 per cent and net profit by just one per cent

from Rs 1,305 crore in 1995-96 to Rs 1,323 crore in 1996-97.

RIL is currently working on a Rs 4,500 crore petrochemicals complex at Jamnagar, Gujarat, where it will produce over one million tonne of paraxylene and four lakh tonne of polypropylene. Plans are also afoot for an ethylene cracker with a capacity of around eight lakh tonne and other downstream projects.

With its large capacities and economies of scale, Reliance is best positioned to take advantage of the next petrochemicals boom expected towards the year 2000 AD.