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BBA- Business environment (HAVE TO ADD IN page no.250)

Case study solution

Summary of the case: This case is all about the reliance Industries swap deal for the export and

import of 36 cargoes of naphtha over the next six months. Reliance petroleums Jamnagar refinery

will export naphthas three cargoes of 50,000 tonnes in every month; same amount of grade

naphtha will be imported for reliance Hazira facility. Reliance needs petrochemical grade naphtha

for its Hazira facility, because which is not being produced at Jamnagar. The deal was done throughJapanese traders Mitsubishi, Marubeni, Itochu, Idcmitsu, and shell.

If Reliance Industries imports naphtha for Hazira petrochemical plant, the company does not have to

pay the 24 percent sales tax, which it will have to pay on local purchase, even if it is from reliance

petro. Besides, Reliance petro will also get a 10 percent duty drawback on its crude imports if it

exports naphtha from the refinery at Jamnagar.

The export of naphtha with Japanese traders is being looked as a coup for Reliance as it gives the

company an entry into the large Japanese market.

Indian refineries have a freight advantage over the Singapore market and can quote better prices.

Questions and Answers

Q.1 Examine the internal and external factors behind Reliances decision for the swap deal.

Ans. There are so many internal and external factors behind reliance decision for the swap deal.

Reliance needs petrochemical grade naphtha for its Hazira facility, because which is not being

produced at Jamnagar. Therefore its cracker at Hazira gets petrochemical grade naphtha from the

international market in return for Reliance petroleum selling another grade of naphtha from its

Jamnagar refinery to the international oil trade.

If Reliance Industries imports naphtha for Hazira petrochemical plant, the company does not have to

pay the 24 percent sales tax, which it will have to pay on local purchase, even if it is from reliance

petro. Besides, Reliance petro will also get a 10 percent duty drawback on its crude imports if it

exports naphtha from the refinery at Jamnagar.

The export of naphtha with Japanese traders is a strategic decision of Reliance Industries, because it

gives the company an entry into the large Japanese market.

Reliance refinery belongs to India and Indian refineries have a freight advantage over the Singapore

market, and can quote better prices.

Q.2 what environmental changes could make swap deal unattractive in future.

Ans. Primary risks that may affect operational results, share prices, and the financial condition of the

Companies are described below. Matters concerning the future with regard to the following

information were those deemed relevant as of the end of this fiscal year.

1. Market and supply

As a chemical manufacturer offering a diverse range of products, the Companies engage in a wide

range of businesses which are subject to a number of risks. Risks associated with market volatility

and feedstock supply shortages concerning the Companies businesses are mainly as follows.

Naphtha, a main feedstock for the Petrochemical and Plastics Segment, is sometimes subject toradical price fluctuations arising from various causes, including public security problems in the

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Middle East or global economic conditions. If the price of naphtha radically increases, it may have an

adverse effect on the operational results of the Companies due to a delay in the reflection of such

cost increases in product selling prices.

The supply of naphtha and some other raw materials is dependent on particular geographical areas

or suppliers. Although the Companies are seeking to reduce the risk associated with their inability to

procure major raw materials by developing multiple supply sources, there is no guarantee that

supply shortages of such major raw materials will not occur. In the event that the Companies cannotprocure necessary major raw materials on their own, such circumstances may have an adverse effect

on the operational results of the Companies

2. Exchange rate fluctuations

The Company and its domestic consolidated subsidiaries import raw materials from overseas and

export finished products manufactured in Japan, and the export value of finished products exceeds

the import value of raw materials.

If the Japanese yen appreciates against foreign currencies, the products will be less competitive in

price compared with products made in foreign countries. Moreover, the reduction in the proceeds

received from exports could exceed the reduction in payments for imports. In order to cope with

these circumstances, the Companies are seeking to minimize the risks by entering into forward-

exchange contracts or making export transactions in Japanese yen. However, since it is impossible to

completely hedge risks due to the mid- or long-term fluctuations in the currency exchange rate,

there is a possibility that the appreciation of the Japanese yen would exert an adverse effect on the

operational results and financial condition of the Companies.

Furthermore, the operational results of the consolidated subsidiaries and equity method affiliates in

foreign countries are converted into Japanese yen for the purpose of preparing the consolidated

financial statement. Depending on the exchange rate at the time of conversion, the values after the

conversion into Japanese yen may be potentially impacted and may negatively affect the operationalresults and financial condition of the Companies.

3. Interest volatility

With respect to the demand for finance, the Companies determine the amount, term, and method

of fund procurement, taking into consideration the demand for finance, financial position, and

financial environment. In preparation for interest rate fluctuations, the Companies raise funds by

combining, as applicable, both fixed interest rates and floating interest rates. If, however, interest

rates rise, the increase in interest expense may have an adverse effect on the operational results and

financial condition of the Companies.

4. Fluctuation in stock market prices

Since most of the securities held by the Companies are negotiable securities with market prices, if

stock market prices decline drastically, the impairment loss may have an adverse effect on the

operational results and financial condition of the Companies.

5. Impairment loss

The Companies have adopted accounting standards for the impairment of fixed assets. If a

significant deterioration in the business environment causes a drastic decline in the market value

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and future profitability of the Companies fixed assets, impairment losses will be recognized and may

have an adverse effect on the operational results and financial condition of the Companies.

6. Deferred tax assets

The Companies recognize deferred tax assets based on projections for future taxable income. Should

projections for future taxable income change, all or part of the deferred tax assets may be deemed

unrecoverable, and this could have an adverse effect on the operational results and financialcondition of the Companies.

Q.3 could there be any strategic reason behind the decision of import and export naphtha?

Ans. Through this swap deal Reliance can enter in a large Singapore market easily, and company

have freight advantage over the Singapore market and can quote better price.

Reliance needs petrochemical grade naphtha for its Hazira facility, because which is not being

produced at Jamnagar. Therefore its cracker at Hazira gets petrochemical grade naphtha from the

international market in return for Reliance petroleum selling another grade of naphtha from its

Jamnagar refinery to the international oil trade.

There is another advantage, If Reliance Industries imports naphtha for Hazira petrochemical plant,

the company does not have to pay the 24 percent sales tax, which it will have to pay on local

purchase, even if it is from reliance petro. Besides, Reliance petro will also get a 10 percent duty

drawback on its crude imports if it exports naphtha from the refinery at Jamnagar.

Q.4 Should Reliance import and export naphtha even if it does not provide any profit advantage?

Ans. Swap deal is a strategic decision of Reliance, because it gives the opportunity for international

trade. Swap deal looks no profit no loss situation; through this deal reliance gets naphtha for Hazira

facility.

There are so many rebates, If Reliance Industries imports naphtha for Hazira petrochemical plant,

the company does not have to pay the 24 percent sales tax, which it will have to pay on local

purchase, even if it is from reliance petro. Besides, Reliance petro will also get a 10 percent duty

drawback on its crude imports if it exports naphtha from the refinery at Jamnagar.

Reliance should import and export naphtha even if it does not provide any profit advantage, because

its a big opportunity for reliance to expand business at international platform.