The acquisition of Gulf Africa Petroleum Corp. (Gapco), an oil marketing company operating in East and Central Africa, by Reliance Industries Ltd hasn’t excited the markets. Reliance’s stock was down marginally to Rs1,957 on Wednesday after the deal was announced.
The reason simply is that Gapco’s size is too small to have any sizeable impact on Reliance’s fortunes. The only indication of the acquired company’s size is that itoperates about 250 outlets. This pales in comparison with the more than 25,000 Reliance outlets that do business in India. Reports say Gapco has 45% of the East Asian market, but then the size of that market is estimated at a mere $150 million (Rs615 crore).
There’s another reason for the market not being enthused with the acquisition: Reliance has not found it advisable to share with its shareholders details of the company it is acquiring or the amount paid for the deal. In the absence of such details, shareholders have no means of ascertaining whether the deal is good for them.
Reliance’s plans to get into oil marketing in India have practically come to naught because of the government’s pricing policy, which favours public sector companies. Gapco’s acquisition can thus be seen as an extension of this attempt to straddle the entire value chain and be a fully integrated player. Some analysts say Reliance could perhaps use this as anintermediate link for its exports to Europe or the US, but unless there are more such acquisitions, they aren’t willing to assign much value to the move. It must benoted that oil marketing opportunities in the bigger markets are already cornered by large global players and it would be difficult to gain a sizeable foothold in this space.
What’s more critical to Reliance’s valuations currently is the government’s decision on the gas pricing issue. The way Reliance shares have moved in the recent past suggests that the markets have largely shrugged off the risk of an unfavourable ruling. The stock has outperformed the market by 12% in the past two months. If the ruling goes against the company, the stock could correct significantly, say analysts.
Much has been made of the slowdown in corporate earnings growth and the implications that will have on stock prices. The markets, however, have so far proved immune to such concerns. That’s because while earnings growth is likely to slow, it’s important to place that deceleration in its propercontext. The Reserve Bank of India’s annual report contains some data showing that the deceleration in growth can hardly be called a slowdown at all.
A table on the financial performance of the corporate sector in the annual report reveals that for a sample of more than 2,000 companies, while sales growth came down to 22.5% in the fourth quarter last year from a high of 30.3% in the third quarter, that rate of growth was higher than the 16.9% notched in 2005-06. The provision for depreciation is growing steadily, from 10.2% in 2005-06 to 16.4% in the second quarter of fiscal 2007 to 18.1% in the third quarter. That’s another indication of the rising capital expenditure being undertaken by corporate India.
But the most striking fact about the data is seen from a comparison of the long-term data between 1990-91 and 1999-2000, on the one hand, and 2000-01 to 2006-07, on the other.
Sales growth for the more than 2,000 sample of companies during the latter period has only been marginally higher, at an average of 14.6% compared with an average 14% during the 1990-2000 period.
But growth in profits has been much higher—gross profits rose from 12.5%during 1990-2000 to 20% during 2000-07, clearly an indication of the structural changes and increased efficiency of the Indian corporate sector.
The growth in profits after tax has been even steeper, rising from 11.8% during the first 10 years after liberalization to 35.6% during 2000-07. That’s primarily because of lower interest rates, less debt on balance sheets and lower depreciation. That trend is now being reversed. Even so, the ratio of profits after tax to sales for the sample, at 10.7% in 2007, was the highest for the subset in the entire 17-year period. That fact needs to be kept in mind when talking about a corporate slowdown.
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