Mumbai: Reliance Industries Ltd, or RIL, India’s most valuable company by market capitalization, has raised around Rs29,000 crore (or $6.17 billion) in the October-December quarter, and the big question among analysts tracking the company is, “what for?”
The amount includes money put in by the company’s main promoter and that raised through debt. An email sent to RIL on the use of this money remained unanswered till late Friday.
In the past six weeks, RIL has raised around Rs12,000 crore in debt, according to some analysts. A senior executive at RIL confirmed that the company had indeed raised this amount in debt, but asked not to be identified because he is not the company’s official spokesperson.
In October, just a few weeks before the company started raising this debt, it received a cash infusion of Rs16,824 crore from its owner and promoter Mukesh Ambani, through the conversion of 120 million share warrants into equity at Rs1,402 a share.
From the front: Mukesh Ambani, promoter of RIL, himself pumped in Rs16,824 crore in October through conversion of share warrants. Abhijit Bhatlekar / Mint
Over the past fortnight, Edelweiss Capital Ltd and JPMorgan Chase and Co. issued statements that they together arranged about Rs3,000 crore for RIL through non-convertible debentures or NCDs. ICICI Bank Ltd and Axis Bank Ltd separately raised Rs1,000 crore each for RIL, the analysts said. Details of the remaining Rs7,000 crore raised from the debt market were not available. Rating agency Crisil Ltd had in November assigned an AAA rating, the highest, to RIL’s Rs10,000 crore non-convertible debentures.
What does RIL need such large sums of money for?
At a time when most companies are scrambling for cash because of the global credit crunch, the second largest oil refiner and the largest petrochemicals maker in the country has been piling cash for reasons that aren’t entirely clear from the outside.
Six analysts Mint spoke to gave several possible reasons behind RIL’s strategy: hoarding money for future projects; making up for treasury losses incurred by trading in crude oil futures trading; and to fund potential acquisitions. These analysts, who track the Reliance Industries stock for various foreign and Indian brokerages declined to be named as they are not authorized to speak to the media.
The RIL executive mentioned in the first instance, and another executive at the company who also asked not to be identified, independently provided the company’s rationale for raising money: to position itself for the future and finance its exploration and production activities.
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“So far, we have invested mostly equity in both our projects (Jamnagar refinery and the Krishna-Godavari basin, or KG basin). Now, we are looking to put in some money through the debt route for the balance investment in these,” the second RIL executive said.
The company is also planning “for future projects that cannot be disclosed for now,” he added.
RIL’s listed subsidiary Reliance Petroleum Ltd (RPL) is building a 580,000 barrel a day refinery in Jamnagar, Gujarat, which is currently on trial runs. The refinery is expected to start operations in the first quarter of 2009.
Output from the company’s gas find in the KG basin is also expected around the same time, provided a current ban on sales imposed by the Bombay high court is lifted.
Two of the six analysts independently put forth a more dismal motive: that the company is anticipating worse times ahead. “The company is just hoarding to get past a worse liquidity squeeze phase in the months ahead, when raising money could be harder,” one of these analysts said.
RIL is expected to incur heavy capital expenditure in continuing its oil and gas exploration activities in 30 blocks, most of them on the east coast. According to a 12 November statement on the website of Niko Resources Ltd—RIL’s 10% Canadian partner in the KG basin block—the “Phase I initial field development costs are budgeted at $5.2 billion.”
Niko had spent $353 million of the total $520 million it was to invest till 30 September, the statement said. The rest of the remaining $4.68 billion has to be spent by RIL, part of which has already been spent.
Niko added that the development plan for nine of the natural gas discoveries in the D6 block in the KG basin have also been submitted to the government which, in turn, will require more investment.
RIL had in 2007 also announced setting up “the largest integrated cracker and petrochemicals complex with a total capacity of 2mtpa” (million tonnes per annum) at Jamnagar. This cracker unit, to be built at a cost of $3 billion and expected to start in 2010-11, will use waste gases from RIL refineries and other byproducts as feedstock to manufacture ethylene, propylene and other products.
“The company could be pre-poning (bringing forward) this project or simply (setting) funds aside for it,” explained a third analyst, also part of the six analysts mentioned in the first instance.
Three of the six analysts also said the company is believed to have booked heavy losses because it bought crude oil futures at higher prices. Crude prices fell 72.88% this year after reaching a high of $147.27 in mid-July.
One analyst also said the company could be building a warchest for a big-ticket acquisition as “distress assets are aplenty” in the global chemicals market now. However, some other analysts and the two RIL executives refuted the possibility of an acquisition, saying margins were low in the business. Moreover, they argued, companies on the block could get cheaper in future.
RIL has also been stretched in the current quarter by shrinking gross refining margins, or the money refiners make by converting crude oil into by-products, and by deep cuts in the prices of key petrochemical products.
In a 3 December note, DSP Merrill Lynch (India)’s sector analyst Vidyadhar Ginde wrote that he was slashing RIL’s target share price 15% to Rs1,555 and its refining margin forecast for fiscal 2010 and 2011 by 37% and 21%, respectively. “KG D6 oil and gas and RPL are the main growth drivers.”
RIL shares have declined 58% from a high of Rs3,220.85 on 14 January. On Friday, the shares dipped 0.81% to Rs1,349.25 on the Bombay Stock Exchange, while the bellwether Sensex rose by 0.23%.
Analysts Varatharajan Sivasankaran and Avishek Datta of Reliance Equities, a brokerage owned by Anil Ambani, Mukesh Ambani’s estranged younger brother, wrote in a 25 November report that they were cutting their earnings-per-share estimate on RIL by 17.1% for fiscal 2009 and by 33.4% for the next year “to factor in lower petrochemical and refining margins along with a delayed start-up of RPL’s refinery and KG-D6 gas (now assumed to start from April 2009).”
RIL has 42 oil and gas discoveries, and while reserves have been declared for just 24 , the remaining 18 discoveries could spring a positive surprise, the analysts added.