RPL: Going out of favour - Views on News from Equitymaster

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RPL: Going out of favour

Sep 14, 2001

The most favoured refining stock, Reliance Petroleum Ltd. (RPL), has significantly under performed the markets. The private sector refinery, since start of the fiscal, has seen its scrip price dip by 33.4% as compared to a drop of 16.2% in the Sensex. Since the announcement of the company's proposed GDR offering the scrip has declined by 39.9%. This underperformance could be due to the following reasons. The slowdown in crude throughput, which grew by 6.4% YoY in 1QFY02 compared to 34.5% is the same period last year, has continued into July '01 reporting a growth of only 2.5% YoY. Although, RPL, for the April - July period of the current fiscal has reported a throughput growth of 24.6% the growth has been slipping. This maybe due to a combination of factors. With operations stabilising over the past year benefits of efficiency YoY are going to reduce. Also, the slowdown in the sector could catch up with the company.

On May 18, '01 the company stated its intention to offer shares in the international markets, through the global depository route (GDR), to strategic or financial investors. As per the offering, the shareholders of RPL will have the opportunity to exit / dilute their holding in favour of GDR investors. The offering is to be made in one or more tranches to be completed by March '02, as per the press release. However, there is suspicion that the offering would be more towards the end of the fiscal, if not delayed. As per reports, Morgan Stanley Dean Witter (MSDW) was one of the lead managers to the issue. The company, MSDW, was the largest tenant in the World Trade Centre towers (New York), which was brought down to rubble by terrorist attacks. Consequently, the investment banker could face bottlenecks in undertaking roadshows for the issue in the city of New York.

Also, the terrorist attacks have led to a spike in the oil markets. This seems largely due to the uncertainty concerning the outfit involved in the attack. In the event any of the OPEC members are indicted there could be upward pressure on prices, as oil supplies could get hit. Either way, early pointers to the perpetrators indicate Central Asian terrorist outfits, which could lead to a disruption in oil supplies if retaliatory activity gets ugly. The resultant rise in feedstock -- crude oil -- prices could adversely impact operating margins of the company. Nevertheless, the company does enter into crude future contracts, which could help it ride over the current volatility.

RPL scrip, at time of the GDR announcement, was trading at Rs 53 on a multiple (PER) of 17.2x FY01 earnings. In terms of price to earnings ratio (PER), RPL was amongst the costliest refineries in the world. The GDR offering could have been postponed due to valuation concerns, as at that price it may not have found any takers. Internationally, integrated majors trade on a multiple between 12x - 17x. Whereas, refining & marketing (R&M) companies trade below 10x. In the domestic market, R&M majors trade on an average earnings multiple 5x. The high valuations did build in additional risk in the stock.


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