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雷达卡
Asia India
Energy Oil & Gas
26 November 2008
Petrochemicals
Tough, long road ahead to
recovery- earliest CY10
S Ramesh
Research Analyst
(91) 22 6658 4029
s.ramesh@db.com
“India Petrochem 2008”, November 17-18 – conference highlights
The delegates were unanimous in their view that the aftermath of the credit crisis
has led to one of the worst downturns ever in the petrochemical sector. Key
reasons cited were 1) excess capacity, 2) a surge in Iranian exports and 3) the
sharp erosion in demand, particularly in China (down 50-90%). Most delegates
expect a recovery only by CY10 or later.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch/ or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Update
Top picks
Reliance Industries (RELI.BO),INR1,071.70 Buy
GAIL India Ltd (GAIL.BO),INR195.10 Hold
Companies featured
Reliance Industries (RELI.BO),INR1,071.70 Buy
2008A 2009E 2010E
P/E (x) 21.9 11.1 10.8
EV/EBITDA (x) 15.6 7.1 5.9
Price/book (x) 3.9 1.4 1.2
GAIL India Ltd (GAIL.BO),INR195.10 Hold
2008A 2009E 2010E
P/E (x) 12.3 6.3 10.8
EV/EBITDA (x) 6.8 1.9 3.7
Price/book (x) 2.8 1.6 1.4
RIL vs Sensex
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
11/07
12/07
1/08
2/08
3/08
4/08
5/08
6/08
7/08
8/08
9/08
10/08
11/08
RIL Sensex
Price trend in Brent, Naphtha, Ethylene
0
20
40
60
80
100
120
140
160
180
11/07 1/08 3/08 5/08 7/08 9/08 11/08
US $/bbl
0
200
400
600
800
1000
1200
1400
1600
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US $/mt
Brent Naptha Ethylene (RHS)
Global Markets Research Company
Trade volumes shrink due to twin syndromes“Naphtha and China”
Speakers and most delegates were in shocked disbelief, even as they candidly
accepted that the industry needs to take a lot of pain, pointing to capacity closures
and the horizon for a recovery. They attribute the recent 60-80% crash in prices
across the chain to i) the collapse in naphtha-based product demand (i.e. gasoline
fuel and the ethylene/paraxylene chains) and ii) the sharp U-turn in China. The latter
relates to China’s mandate for higher fuel production to meet shortages, carried
out at the expense of chemicals. The government’s reversal then created a supply
deluge, even as its tight money policy choked credit and demand (down 50-90%).
The rise in cheap ethylene exports from Iran to Asia added to woes. With the price
collapse, producers are groaning about rising stock as buyers are scarce.
Earliest recovery in CY2010 – some believe not until CY11-12
Operating rates in naphtha-ethylene-polyolefins and naphtha-paraxylene-polyester
chains have already been cut 70%. According to consulting company Dewitt & Co.
10-15% of global polymer capacity is shut and another 10% needs to be removed
to restore normalcy. CMAI believes that margins for naphtha-ethylene and
paraxylene-PTA are at historic lows of nil to negative.
Consolidation is inevitable; competitiveness key to survival
A.T. Kearney stated in its paper that consolidation and capacity rationalization are
the only way forward. Others, including Reliance Industries (RIL), believe that
change is inevitable and overall cost competitiveness holds the key to survival.
Glimmer of hope of trade revival; RIL trading at distressed price
We believe that buying interest is indeed reviving (particularly in India and Asia)
based on discussions with industry delegates/consultants. According to Haldia
Petrochemicals, this may arrest the downward trend in demand. Even if growth
takes time, maintaining current demand should help stabilize industry operations at
current rates. But some, such as Chemical market associates (CMAI), were
pessimistic and do not expect a revival until CY11-12. The consensus was that
globally cost competitive players such as Reliance Industries (RIL), would survive
the famine and reap the harvest from the next upturn. We maintain Buy on RIL
(INR1595 TP), as it is trading at what we view as distressed valuations that already
price in the downturn. Any signs of a settlement of the gas dispute between
RIL/RNL could trigger a quick rally. We maintain Hold on GAIL (INR205 TP). For
more valuation and risks please see pages 7-12.
This report is based on papers presented at the annual “India Petrochem
2008” in Mumbai on November 17-18 and our sideline discussions with
speakers and fellow delegates in attendance.
Table of Contents
“Bleak ” sums it up ........................................................................... 3
Summary highlights ..................................................................................................................3
China events, naphtha fall, trigger sharp decline in demand.....................................................3
Shocking fall in August-October 2008.......................................................................................4
RIL at distressed valuations.............................................................. 7
Stock price implies nil petchem earnings, no future E&P success ...........................................7
Impact of stress assumptions on petchem prices/PEs.............................................................8
Future catalysts for RIL .............................................................................................................8
Valuation ................................................................................................................................10
Risks: .....................................................................................................................................10
GAIL – Petrochemicals leverage a big concern............................. 11
DB sector overview ......................................................................... 13
Recovery by CY12; global economic revival holds the key .....................................................13
Conference speeches-a flavor......................................................... 15
AT Kearney – Industry headed for consolidation.....................................................................15
CMAI – Bleak outlook for aromatics........................................................................................15
Dewitt & Co. – Two years of pain in polyolefins before revival...............................................15
Reliance Industries..................................................................................................................15
Haldia Petrochemicals.............................................................................................................15
Conversations .........................................................................................................................16
Plant closures already making news .......................................................................................16
Appendix A: Key extracts................................................................ 17
Industry structure – A strategic perspective ...........................................................................17
Indian petrochemicals/polyolefins overview ...........................................................................21
Long-term growth drivers for Indian plastics demand ............................................................22
Appendix B: Financials.................................................................... 24
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