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Reliance: OilTel holds key - Views on News from Equitymaster
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  • Mar 12, 2003

    Reliance: OilTel holds key

    Reliance Industries (RIL), the largest Indian private sector company, has been quite lackluster on the bourses in the last couple of months. It must be noted here that inspite of beating street expectations and coming out with good third quarter numbers for FY03, the stock has not evinced buying interest.

    Just to brush up the results a bit, RIL posted strong numbers for 3QFY03. The topline of the company increased by nearly 7% to Rs 109 bn, driven by increased realisations (5%) and marginal growth in volumes (2%). The company's performance on the petrochemical segments front has been better as compared to its refining business. This was largely driven by higher realisations. The company's thrust on specialty polymers, which commands 15%-18% premium over commodity prices, has fuelled growth.

    Going forward, the company has huge plans to get into the retail segment by setting up petrol pumps across the country. Since marketing margins are on the higher side, the move will benefit the company. With the discontinuation of the administered price mechanism (APM) regime, private companies can now sell fuel directly to the consumers. That said, the prices are determined once in a fortnight.

    With the government selling a part of its stake in India’s two largest oil-refining majors, Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL), there is every possibility of international petroleum majors entering the domestic markets to grab a pie. This could give the domestic petroleum behemoth some competition. Of course, it is likely that Reliance will also bid for the stake in the strategic divestment of HPCL. This way, the company can gain access to the already huge retail network of the company being divested.

    Plan Outlay ($ m)
    Telecom 5,000
    Biotech 25
    Power 150
    Divestment 500
    However, a huge concern for the company remains its exposure to the telecom sector. Reliance Infocomm, a subsidiary of Reliance industries, was set up with an investment objective of Rs 250 bn. The new company made headlines during the launch of its limited mobility service by offering STD (restricted to Reliance network) at 0.40 paise per minute. However, it is too premature to draw conclusions on this front.

    It seems that the company has stepped into too many shoes at the same time and that too with huge financial commitments. The company has huge outlays in the pipeline e.g. oil-marketing and infocomm. However, it must be remembered that the company’s cash flow is pretty strong. Moreover, Reliance is in the commanding position as far as borrowing goes. At the end of the nine months ending December 2002, the company has been able to take advantage of the soft interest rates and reduce its interest outgo by almost 17%. Moreover, now after the merger of Reliance Petroleum with Reliance Industries, the company’s strong balance sheet gives it a better bargaining power in times of raising money.

    At a price of Rs 286, the stock trades at 10x annualized 9mFY03 earnings. These valuations are lower compared to international peer companies like Exxon-Mobil combine that command a P/E of above 15x (Chevron/Texaco also commands a P/E of around 60x). But then both the aforesaid international entities are much bigger in size and reach as compared to Reliance. Also, they already have a big retail presence. Reliance on the other hand, still has to go the distance. Its telecom initiative is also at a nascent stage. Considering the huge investments riding on this sector, the success of this initiative is vital for boosting investor confidence.

    (US$) Reliance Exxon-Mobil Chevron-Texaco
    Sales (bn) 11.7 54.2 99.0
    PAT (bn) 0.7 2.6 1.1
    CMP* 6.0 34.6 63.7
    EPS 0.48 2.2 1.1
    P/E (x) 12.4 15.8 59.6

    Note: All figures as at the end of respective FY02 year ending.
    * Current Market Price as on March 11, 2003

    On the positive side, the discovery of gas in the Krishna-Godavari basin could provide some trigger for the stock in the future, as the details of the gas find become clearer. Also, with the company’s exports of petroleum products at better prices and renewal of interest by Qualcomm in Reliance Infocommm could be vital for the stock going forward.



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