Reliance juggernaut back in action

Reliance Industries is all set to turn itself into an ever bigger, gargantuan corporation from the Indian business world.

The company has announced its brand new investment plans with over $20 billion (approximately Rs 88,000 crore) to be deployed over the next five years in oil and gas exploration, refining, fuel retailing and organised retail.

The company recently announced an investment of $3 billion (Rs 13,200 crore) to build one of the world's largest integrated cracker and petrochemicals complex with a total capacity of 2 million tonne a year in the special economic zone (SEZ) next to its refinery in Jamnagar, Gujarat.

This would make it one of the largest manufacturers of ethylene, propylene and specialty derivatives.

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Of the total investment, $5.2 billion (approximately Rs 25,000 crore) is to be invested in oil and gas exploration and production, mainly in the Krishna Godavari (KG) basin in Andhra Pradesh.

The first phase of exploration of KG basin is expected to deliver 40 million standard cubic metres per day (mmscmd) of gas, which has been committed to National Thermal Power Corporation (NTPC) for its 2,650 MW expansion at Kawas and Gandhar in Gujarat and to Reliance Natural Resources (RNRL) for Reliance Energy's 3,750 MW power plant at Dadri, Uttar Pradesh.

"The estimates of reserves have been revised to 80 mmscmd, which would make up almost half of India's total production of gas," says Rohit Nagraj of Angel Broking.

In addition to the 29 domestic oil blocks and four international blocks, Reliance has been awarded two deepwater blocks in KG basin, five in the Mahanadi basin in Orissa, two blocks in Yemen and one in Oman, which totals Reliance's exploration acreage to 463,940 sq km.

Refined efficiencies

In the third quarter of 2006, Reliance Industries reported a gross refining margin (GRM) of $11.7 a barrel versus $9.1 a barrel of the second quarter and outperforming the regional benchmark by a whopping $7.8 a barrel.

Some analysts attribute this to weaker crude prices on a sequential basis along with operational efficiencies and flexibility, and believe that the company can continue to perform as well going forward.

On the other hand, a number of analysts believe that this performance was a one-off phenomenon and Reliance may not be able to maintain its high GRMs on a consistent basis.

Further, the company is already making investments of about $7.6 billion (Rs 33,440 crore) in oil and gas refining. Of this, an investment of about $6 billion (Rs 26,400 crore) has been made in Reliance Petroleum, a 75 per cent subsidiary.

This refinery is expected to turn operational by the year 2010-11. At present, the world's third largest refinery, it will become the largest after doubling its capacity to 1.24 million barrels a day, via expansion.

Another $1 billion (Rs 4,400 crore) is to be invested in the expansion of its fuel retail business, which still has to break even as it suffers from under-recoveries from fuel prices.

"PSU oil marketing companies get compensated for the losses they make on account of the subsidy burden through oil bonds issued by the government. Private firms like Reliance and Essar Oil need to absorb the under-recoveries themselves," says Angel's Nagraj.

Ethylene expansion

Reliance has recently announced an investment of $3 billion (Rs 13,200 crore) in a cracker plant in an SEZ in Jamnagar, next to its existing refinery.

This plant is expected to go on stream by 2010-11, and would make the company one of the largest manufacturers of ethylene, propylene and specialty derivatives and bring Reliance in the league of global majors like DuPont, Dow Chemicals and British Petroleum.

The plant will also be able to achieve competitive cost efficiencies because it would utilise refinery off-gases and other by-products as feedstock to manufacture its products.

Rising retail

In a move to quickly expand its presence in the organised retail business, Reliance opened nine Reliance Fresh stores in New Delhi on January 29, while it already has stores in cities like Hyderabad, Chennai and Jaipur.

The company had also acquired 54 Adani Retail stores in Gujarat. The company has plans to invest about $5.5 billion (Rs 25,000 crore) in its retail initiative over the next five years, in order to set up about 1,000 stores by the year-end and about 4,000 stores in five years. Reliance Retail has a sales target of Rs 100,000 crore (Rs 1,000 billion) by 2011 through these stores.

Cruise control

Last year, promoters Mukesh Ambani and associates have increased their shareholding in the company from 46.67 per cent to 50.62 per cent by purchasing shares from the open market.

On February 24, the company announced that the promoter group plans to raise its stake in the company to 55 per cent by issuing 120 million warrants convertible into an equal number of shares over a period of 18 months.

The issue price of the shares arising out of exercise of warrants is fixed at Rs 1,402, a 12 per cent premium to the average price in the previous six months, and at about the same level as the prevailing stock price.

This warrant issue will help the company in part-financing its huge investment plans, and see the promoters' stake going up. On exercise of these warrants, the paid up capital of the company will increase from Rs 1,393 crore (Rs 13.93 billion) to Rs 1,513 crore (Rs 15.13 billion).

"An increase in the promoter's stake in the company reassures its shareholders of its potential growth and Reliance has a proven track record," says Jaspreet Singh of Prabhudas Lilladher.

Valuation

Considering the amount of investment and the long time horizon in its new initiatives, the impact on earnings will be visible only from FY10.

"The KG basin is expected to contribute about 25 per cent to the company's operating profit from FY10, while the cracker plant will start contributing from FY12 onward," says Angel's Nagraj.

The stock is valued at 16.6 times and 13.4 times its expected FY08 and FY09 earnings, respectively.

"Reliance Retail itself will contribute to one-third of the company's revenues," adds Nagraj. Long-term investors will find India's largest company in terms of market capitalisation an attractive investment.