Reliance Industries Ltd (RIL), GAIL India and Indian Oil Corporation Ltd (IOCL) among the companies in the oil and gas sector are likely to see their petrochemical margins remain under pressure due to the growing capacities of Chinese refiners, analysts said.
Chinese refiners have increased their petrochemical capabilities to diversify away from transportation fuels such as gasoline and diesel and reduce dependence on imports.
The world’s largest producer and consumer of petrochemicals, China has added new petchem capacities and improved its self-sufficiency. About 1.4 mmt of new polyethylene (PE) capacity (most of which is for HDPE) is expected to come online in 2023, up 8.5% YoY, brokerage firm Prabhudas Lilladher said.
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China’s net polypropylene (PP) imports fell from 26.7% in 2013 to just 10.7% in 2023. HDPE imports halved from 52% to 25.4% over the same period. Imports of LDPE and LLDPE decreased from 56.7% and 44.6% in 2019 to 48.3% and 35.4% in 2023, respectively.
This is how China reduced its dependence on imports. Along with this, demand concerns also persist in Europe due to high inflation and interest rates. This has led to depressed product margins, the brokerage firm noted.
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Swarnendu Bhushan – Co-Head of Research, Prabhudas Lilladher Pvt believes that these macro developments are likely to impact the Indian petrochemical sector. Petchem margins have been depressed since the start of 2023 and he expects Reliance Industries (RIL), GAIL India and Indian Oil Corporation to remain weak in 2024 as well, due to production capacities exceeding demand.
“Capacity increase would lead to a supply glut, amid a lack of commensurate global demand. We expect the petrochemical margins of RIL, GAIL India and Indian Oil Corporation to remain depressed in the near to medium term,” Bhushan said.
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The brokerage firm downgraded its rating on Reliance Industries to ‘Accumulate’ from ‘Buy’ with a SOTP based unchanged target price of ₹2,618 per share. It values RIL’s standalone business at 7.5x FY26 EV/EBITDA, Jio at 15x FY26 EV/EBITDA and Retail at 37x FY26 EV/EBITDA.
The brokerage maintained a “Buy” call on GAIL India, driven by strong transmission and business segments and raised the target price to ₹151 per share of ₹139 earlier.
For IOCL, it has maintained a ‘Hold’ rating with an unchanged target price of ₹94 per share.
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Updated: 24 Nov 2023, 13:01 IST