Reliance Industries, IOC to gain from Budget move on PVC, naphtha

The proposal in the Budget to increase the Customs duty on polyvinyl chloride (PVC) while reducing those on naphtha and ethylene di-chloride (EDC) is expected to benefit Reliance Industries (RIL), Indian Oil Corporation (IOC) and others in similar business segments.

The Finance Bill proposes to raise the duty on PVC from 7.5 per cent to 10 per cent, to reduce that on naphtha to four per cent from the existing five per cent and on EDC to nil from the earlier 2 per cent. These changes are expected to improve realisation and reduce feedstock prices for PVC makers and naphtha-based petrochemical producers.

“The increase in customs duty on PVC would increase the realisations for PVC manufacturers such as RIL, Chemplast Sanmar, Finolex Industries, DCW and DCM Shriram,” went ICRA Ratings' note on the Budget, on Monday. The government says the aim is a level field for domestic industry. PVC is widely used in building and construction, including pipe manufacturing.

Analysts with Prabhudas Lilladher expect the hike in PVC customs duty to help improve RIL’s earnings margin by 2.5 per cent. Reliance has 38 per cent of the Indian polymer market. The reduction in customs duty on EDC will also help PVC makers save on input cost. “The move would improve the margins of EDC-based producers such as RIL, Chemplast Sanmar and Finolex,” ICRA said.

The cut on naphtha would give more benefit to RIL, ONGC Petro Additions and IOC.

“(This) would impact the realisations of refining companies (which sell), as products are priced on import parity basis. Albeit, if they are integrated with naphtha-based petrochemicals (use naphtha as raw material), the latter segment will be benefited,” ICRA said in its note. RIL uses naphtha as feedstock for petrochemical production.  IOC uses it at its Panipat unti to produce 360,000 tones a year of paraxylene. Urea-based fertilizer production is also bound to gain, as naphtha is feedstock there. 

“These are definitely positive changes for RIL. However, given the scale of the company, these won't do much to show a significant change in earnings,” averred an analyst who did not wish to be identified.