EoU status to Jamnagar unit will boost RIL profit

Reliance Industries Ltd's (RIL) move to seek the status of an export oriented unit (EoU) for its existing refinery at Jamnagar would boost the bottom line as it saves taxes and increases sales in the higher-margin export markets.

An EoU status grants 100 per cent income tax holiday till March 2009. "The income tax holiday owing to the EoU status would be significant even if the company were to enjoy it for just two years," said an analyst tracking the company. The Reliance stock, having the highest weightage of 11.33 per cent on the sensex, was up by 2.55 per cent on the Bombay Stock Exchange (BSE) on Thursday at Rs 1,374.25. The Sensex too rose by 2.80 per cent.

Reliance officials highlighted the iniquitous domestic market as the reason for seeking the EoU status. RIL has not been able to make a dent in the domestic retail market, since it has to compete with the subsidised products of the government-owned oil retailers. "The government does not compensate us for selling automobile fuels below market prices. So we are looking to export a major chunk of our products," a Reliance executive said.

The company plans to feed its 1,800 odd-retail outlets by buying automobile fuels from the state-owned inland refineries - which are typically not export oriented - while exporting their own products, according to industry sources. Currently, Reliance exports around 65 per cent of the products manufactured at its 33 million tonne a year refinery at Jamnagar. This is expected to go up to 75 per cent. Tax expert and former member of the Central Board of Excise and Customs, Sukumar Mukhopadhyay, said RIL's move towards EoU is aimed at minimising procedural bottlenecks in claiming refunds for indirect taxes paid.

The EoU status will also allow Reliance duty free import of crude oil. On an average, the company's crude oil imports is 6 lakh barrels a day. If crude price is taken at $60 a barrel, this will translate into $36 million worth of imports a day. The EoU status will free up working capital worth $1.8 million, or 5 per cent of the daily crude oil imports. More than 50 per cent of the overall cost at the refinery is in the form of crude oil imports.

Enhanced exports from the refinery will result in lesser sales to government-owned oil marketing companies. A Reliance spokesperson declined to comment on the issue. Industry sources said Reliance is planning to cut production of LPG at its Jamnagar refinery by almost 1 million tonne a year. The government does not allow LPG to be exported as the country is not self-sufficient in LPG production.

Reliance's Jamnagar refinery, which is the country's largest refinery, produces over 7,500 tonne LPG a day.

If Reliance cuts LPG production, supplies to state-owned oil marketing companies could suffer. "The gap can be bridged through imports, but there is lack of adequate infrastructure to handle increased imports of LPG," the official with the oil marketing company said.

As for other products, "there is surplus in the domestic market anyway. With new government-owned refineries coming up, and existing refineries being expanded, production would only increase," an official with a public sector refinery said.