• JULY 27, 2001

Reliance Petro: Leveraging on size

By virtue of its size, Reliance Petroleum Ltd. (RPL), in its very first year of operations, has powered its way into the top echelons of Corporate India. RPL is the largest company by sales and second only to its parent, Reliance Industries (RIL), in terms of profits.

These achievements have been made possible by the gargantuan, 27 million metric tonnes per annum, refinery set up at Jamnagar, Gujarat making it the largest grassroot refinery in the world. In FY01, the first year of commercial production, the company reported sales of Rs 309.6 bn ($6.6 bn) and net profit of Rs 14.6 bn ($311.5 m). Verdict of the market -- RPL is the sixth largest company by market capitalization on the Indian bourses.

Comparative Sheet
CMP* 43 150 179
Market cap 205,632 50,813 53,700
Sales 309,630 485,668 459,321
EPS 3.1 32.1 27.3
P/E Ratio 14.0 4.7 6.6
* Current market cap # nos are for FY01

Although the absolute numbers itself make one take notice the real show stealer is the operating margins earned by the company. RPL reported operating margins of 10.1% in FY01 while leading competitors earned an average margin of 3.8% at the operating level. The ability to beat industry averages could be attributed to the engineering prowess leading to superior plant configuration. This has enabled the company to distill a variety of crude oil (sweet & sour) on dynamic basis to better meet the market requirements. This has facilitated optimization of product mix and processing of higher value items (lower ends), all of which have ensured higher margin earnings ability.

A further boost to the financials is awaited in the form of deregulation of the petroleum-marketing segment. Satisfying the conditions of private sector entry, RPL has already applied for approval to distribute petroleum products. Along with dismantling of the administered pricing mechanism (APM) the segment is expected to be opened up to private competition by April 1, 2002. Currently, the four controlled products are lifted by the three state-run refining & marketing (R&M) companies at international prices, which could be another reason for the better margins. The output is lifted in the proportion of 50% and 25% each by Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL) respectively. The non-controlled products are sold directly by the company of which 20 to 30 % is sold directly by the company.

Post deregulation the company has already tied-up product evacuation from the refinery. IOC will continue to market 50 % of the produce. As for the remaining, RPL and IOC have agreed to form a joint venture (JV) marketing company, which could utilize the existing set up of IOC or establish an independent channel. Nevertheless, RPL is still keeping its entry strategies open. The possible strategies could be:

  • Continuing existing framework
  • Setting up independent distribution network
  • Acquisition of marketing assets

    Under the first alternative, RPL will not enjoy the complete upside from marketing petroleum products, as margins will have to be shared with the JV partner. Under scenario two, building a network to match the strength of the competitors will involve a huge capital expenditure programme and considerable amount of time. The company may not adopt this strategy in isolation, as at the onset, RPL will not have a channel in place. Acquisitions, at fair valuations, is the most attractive, as it will allow an instant entry into the marketing field. It is most likely that the company will adopt a combination of the above strategies.

    RPL has also acquired stake in pipeline companies to ensure safety of product evacuation. The company has acquired 10 % stake in Petronet India, a JV between public sector energy companies, to set up pipelines across the nation on a common carrier principle. It has acquired 13 % stake in Petronet V.K (Vadinar - Kandla), which already operates a 113-kilometer (Km) pipeline Jamnagar to the Kandla - Bhatinda pipeline. This transmission pipelines carries petroleum products to the high consumption areas of the North and North West. As per reports, the company has also received approval to build the Central India pipeline on build, own, operate, transfer basis (BOOT) along with IOC. The three partners RPL, IOC and Petronet hold 26% each in the project. RPL is to invest Rs 5 bn for a stake in the 1,615 km pipeline extending to petroleum deficit regions of Central India. However, this project has attracted controversy with other oil majors objecting to RPL - IOC combine running the project, as it goes against the common carrier principle.

    As per some reports, the company is contemplating augmenting the refining capacity of the plant by 10% to 30 MMTPA. The higher output is expected to be achieved through debottlenecking exercise. However, the company is silent on the issue.

    On May 18, the company announced the sponsorship of a global depository receipt (GDR) offering. The international offering is targeted towards strategic and financial investors. RPL will not issue fresh equity shares but existing promoters and minority shareholders will be provided the option to divest a part of their shareholding. The offer is expected to be completed by March 31, 2001 in one or more tranches. Attractive pricing of the offer could also provide an upside to scrip on the domestic bourses in the short term.

    Having said that RPL in terms of price to earnings ratio is amongst the costliest refineries in the world. Internationally, integrated majors trade on a multiple between 12x - 17x. Whereas, R&M companies trade below 10x. In the domestic market, R&M majors trade on an average multiple 5x. At Rs 42, the company trades on a multiple of 13.6x FY01 earnings. Consequently, the scrip attracts risk in case the markets decide to value the company at par with its peers.

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