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Reliance Industries -- Slipping up for the first time

Raghuvir Srinivasan

It must be a new experience for Reliance Industries (RIL). After all these years of hectic growth in both sales and profits, RIL has, for the first time in recent memory, registered a drop in both these parameters in the fourth quarter of 2000-01.

The significance of RILs results, announced on Monday, lies not in the figures for the full year 2000-01 but in that of the January-March 2001 quarter. The company has posted a 17 per cent drop in net profits to Rs 540 crores (Rs 654 crores) and a 2 per cent drop in sales to Rs 6,444 crores (Rs 6,594 crores) in this period. The rise in turnover and net profits of 38 per cent and 10 per cent, respectively, for the entire financial year 2000-01 masks what is probably a significant pointer t o near term trends in the petrochemical industry.

The sharp drop in product prices since the peak of October 2000 has obviously laid RIL low. What compounded RILs discomfiture was the equally sharp rise in international prices of its main feedstock, naphtha. The pincer effect of higher input prices and soft product prices has had the necessary deleterious impact on RILs bottom-line. The prices of all its major products- polypropylene (PP), polyethylene (PE) and polyester staple fibre (PSF) are sharply off their October 2000 highs. For example, RILs mon ey spinner, PP, at its March 2001 selling price of Rs 40,800 per tonne was 15 per cent off its high of Rs 48,150 per tonne price in October 2000. It is down further to Rs 39,300 per tonne in April. Similarly, its other major bread-winner, PE, is off by 1 5 per cent as well from its October 2000 high of Rs 52,000 per tonne. The only product to hold steady has been linear alkyl benzene (LAB) but it accounts for only a minor part of RILs turnover in value terms.

The prospects for the first half of this year, 2001-02, appear not too bright due to the following factors.

* Continued buoyancy in global crude oil prices. This means that there is little prospect of a retreat in the prices of RIL's feedstock, naphtha, which is linked to oil prices. The higher input prices are a significant handicap in an environment where it is not possible to pass on the rise through higher product prices.

* A continuation of soft polymer and fibre prices. This appears a distinct possibility given the current state of the US economy, a prime consumer of plastics in the world. The Indian economy is in none too good a shape either with major plastic-using in dustries such as automobiles in reverse gear. This means that the pressure on RIL to maintain volume growth would be high. The combination of slower growth in volumes and soft product prices can be quite an uncomfortable proposition.

* RILs foray into infocom, power and insurance, all through subsidiary companies is a fact that could make the market uncomfortable. All these industries are by nature long-gestation and profits could be quite a while away. If the Institute of Chartered Accountants of India's new accounting standard on consolidation of accounts is applied, the resultant consolidated picture may not be as bright as RIL's accounts for 2000-01 are.