RIL to invest $27 billion in next four years: report
Deutsche Bank report says RIL at cusp of next capex cycle; amount 50% more than Mukesh Ambani stated in June ’12
RIL’s management expects its money-losing retail venture to break even next fiscal, the report said. Photo: HT
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Updated: Wed, Mar 13 2013. 12 22 AM IST
Mumbai: Reliance Industries Ltd (RIL) will invest around $27 billion (Rs.1.47 trillion) in the next four years till the end of fiscal 2017 across its various businesses, according to a Deutsche Bank
AG report issued after its analysts met one of the company’s two joint
chief financial officers (CFOs). The number is about 50% more than the
estimate mentioned by RIL chairman Mukesh Ambani in June last year.
“We believe RIL is at the cusp of its next capex (capital
expenditure) cycle as it invests around $27 billion over FY13-FY17 (85%
in its core business),” said the 11 March report by analysts Harshad
Katkar and Amit Murarka.
In a related development, the report also said that RIL’s
management expects its retail venture, which has been a loss-making one
thus far, to break-even next fiscal.
RIL has two joint CFOs, Alok Agarwal and V. Srikanth. The Deutsche Bank report didn’t specify which of them it met.
The company reiterated its investment target in an email that it sent in response to queries.
“As highlighted in the past, we have plans to invest around Rs.100,000
crore over the next five years in India across our businesses,” the
company said. “We are also planning to invest in a series of projects to
develop around 4 trillion cu. ft of discovered natural gas from the
KG-D6 block, which would entail a potential investment in excess of $5
billion over the next three to five years. RIL’s share would be around
60% for this potential investment.”
The company added that “any additional capital expenditures in Deutsche Bank’s report is based on their own estimates”.
Reliance said, “All these projects are proposed to be
fully funded by RIL through a combination of export credit agency
financing, accessing the public markets, syndicated loans and cash that
exists on the balance sheet.”
The Deutsche Bank report provided a break-up of RIL’s
proposed investment as per its calculations—$11 billion for exploration
and production (including US shale gas), $4 billion on refining, $8
billion for petrochemicals, $3 billion on telecom, and $1 billion on
retail.
The Deutsche Bank analysts noted that their meeting with
RIL’s joint CFO convinced them of their bullish view based on
expectations of approval for gas price increases in fiscal 2014;
approvals for the company’s R-Series gas field in the Krishna-Godavari
(KG) D6 gas reservoir and development plans in the next fiscal for the
NEC-25 gas block; improving visibility on monetization of these
discoveries; and the start of a new capex cycle.
The prospects of RIL’s hydrocarbons exploration and
production business have begun looking up after a period of challenges
over the last three years, especially with gas production from the
flagship D6 reservoir in the KG basin falling.
The company and its British partner BP Plc have been lobbying for more remunerative gas prices. The demand may have received a boost with a committee led by C. Rangarajan,
chairman of the Prime Minister’s economic advisory council,
recommending a new formula for gas pricing in India. According to this,
natural gas prices work out to around $8 per million British thermal
unit (mmBtu), nearly double the current $4.2. To be sure, the pricing
proposal is yet to be accepted by the government, although the agreement
to supply gas at $4.2 per mmBtu ends next year.
RIL and the oil ministry—especially under former minister S. Jaipal Reddy—have
also had several disputes ranging from differences on understanding of
the cost recovery entitled to the company from its operations at D6, to
approvals for RIL’s work programme across various blocks getting stuck.
The relationship has however improved since M. Veerappa Moily became oil minister in October.
In connection with the new investments RIL is likely to
make over the next four years, the Deutsche Bank report said these were
likely to yield an incremental Ebitda (earnings before interest, tax,
depreciation and amortization) of $3.5 billion annually starting in
fiscal 2017.
The report “estimates the petchem (petrochemicals) and
refining capex to have low pay-back periods and high incremental
returns.” Investments in retail, shale gas and telecom are expected to
“start contributing materially” from fiscal 2016.
The proposed investment, according to the report, is
higher than that envisaged by chairman Ambani while speaking at the
company’s last annual general meeting in June. Ambani had said that RIL
would be investing nearly Rs.1 trillion over the next five years in India to “build a stronger and more diversified Reliance”.
RIL has cash and cash equivalents of around Rs.80,000
crore and has been raising money through bond sales in the public debt
market, all of which may be utilized to fund the conglomerate’s
investment plans.
Since much of the equipment and services needed by RIL
for the augmentation of capacity at the refining and petrochemicals
complex at Jamnagar in Gujarat have to be imported, RIL will also look
at funding from international export credit agencies, a senior RIL
executive had said in January. He didn’t want to be identified.
“There was a lull in Reliance for the last two years where things were quiet, but activity appears to be picking up,” said S.P. Tulsian,
a Mumbai-based independent stock market analyst who has been covering
RIL since its listing in 1977. “There is positive news with the oil
minister talking of resolving issues involving RIL and gas pricing. But
we will only start to see the impact of these investments gradually
after the next four quarters or so.”
The Deutsche Bank report is one in a series of recent analyst reports that are positive on RIL.
An 11 March report by Bank of America-Merrill Lynch (BofA-ML) upgraded RIL to “neutral” from its earlier rating of “underperform” and revised the price target upwards by 9% to Rs.893
per share. The BofA-ML report cited an improved outlook on refining
margins and a recovery in earnings growth by 8-13% between fiscal 2014
and fiscal 2015 as the primary reasons for the upgrade.
“RIL’s GRM (gross refining margin) is up in the last two
quarters and the strength appears sustainable,” the BoA-ML report said,
citing global demand for oil products outstripping net refining capacity
addition as the main reason.
GRM is the difference between the cost of processing crude and the value of petroleum products sold.
A 4 March Reuters report said Morgan Stanley had upgraded RIL to “overweight” from “underweight” earlier and raised the price target to Rs.961 per share from Rs.798
earlier. The report said the investment bank stated in its report that
the operating environment was improving across RIL’s core businesses and
that should “spur a renewed earnings upgrade cycle”.
RIL gained 0.45% to close at Rs.847.5
Tuesday on the BSE, while the benchmark Sensex lost 0.41% to 19,564.92
points. In the past year, RIL has gained 6.34% and the Sensex has risen
11.24%.
rohit singh pgdm
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