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Reliance Industries Ltd
The merger ratio of one share of Reliance Industries (RIL), for every 16 shares of Reliance Petroleum (RPL) has, quite unexpectedly, been in favour of RPL shareholders. That’s probably why RIL stock stayed in the red on Monday, at levels of around Rs 1,225. Even the news that the treasury stock will be cancelled, implying a very small dilution in the equity base of just 4.4 per cent, making the merger earnings accretive, wasn’t good enough for the Street. As also the fact that the company will have access to between $1.5-$1.8 billion worth of cash flows from RPL when it scales up operations fully.

In fact, little changes at RIL since it already owned about 70 per cent in RPL and at a consolidated level, the net debt to equity ratio will hardly change. What the merger achieves is that it allows the cash generated in RPL to be used more effectively and at the same time, eliminates any transfer pricing, dividend distribution tax and other such issues. For sure, the two companies must have exploited synergies where possible but from now on, it will be easier to do so.

Reliance Industries Ltd (updated - 08 July 2009)
With little clarity on whether gas produced in blocks allotted under NELP I-VII will be eligible for a tax holiday, and an increase in rate of minimum alternate tax (MAT) to 17 per cent, the Reliance Industries stock has lost 8.4 per cent in the past two trading sessions. The union budget for 200910 has a provision allowing for a seven year tax holiday under section 80IB(9) for gas produced from blocks auctioned under NELP VIII.

However, it’s not clear whether the tax holiday will be allowed for the seven previous rounds of NELP. Since RIL’s D6 block is a NELP I block, it’s possible it will not be eligible for a tax break. Assuming RIL doesn’t get a tax exemption for its gas and factoring in lower refining margins and ahigher MAT, the hit to RIL’s earnings, analysts estimate, could be around 12 per cent in the current year and around 14 per cent in the next two years.

RIL is expected to turn in revenues of around Rs 1.6-1.7 lakh crore in the current year and net profits in the region of Rs 18,000 crore, translating into an earnings per share of just under Rs 113. While the stock currently trades at Rs 1,885, Kotak Securities has aput a 12-month fair value to the stock of Rs 1,600.

The increase in the MAT rate will also hurt the earnings of Cairn India, another exploration and production (E&P) player, by about 6-8 per cent each in 2009-10 and 2010-11, estimate analysts. Cairn’s bottom line will get a big boost once it starts production at its Rajasthan oil block and the company’s net profit in 2010-11 is expected to be in the region of Rs 4,000 crore, translating into an earnings per share of just over Rs 21.

The Cairn stock lost 4.7 per cent on Monday after the budget announcement though on Tuesday it was steady at around Rs 220. At this level the stock trades at just over 10 times estimated 2010-11 earnings.
source - BS

Reliance Industries Ltd (updated - 16 June 2009)
The Street had been expecting a more favourable verdict for Reliance Industries Ltd (RIL) in its case against RNRL, for the supply of gas to the latter.
However, according to the High Court ruling, RIL will now have to supply 28 million cubic metres (mmscmd) of gas to RNRL at $2.34 per unit rather than at $4.2 per unit as was widely anticipated.

The stock came off by 7.5 per cent on Monday 2,180 with most industry watchers feeling that the oil and gas major may have to supply 12 mmscmd of gas to power generation firm NTPC too at the same price, although the agreement between RIL and the public sector firm, was an entirely different one.

Most analysts had factored in a selling price of $4.2 per unit for the 40 mmscmd in their earnings estimates and, post the court’s ruling, will need to revise these. While the company’s earnings may not be hit immediately because neither RNRL nor NTPC May utilise the gas at least for another year till their power plants are constructed, the lower price realisation could shave off around Rs 20 from RIL’s earnings per share of an estimated Rs 170-172 in 2010-11. RIL, of course, has the option to appeal to the Supreme Court.

However, even after the correction in the share price, analysts believe the stock may not outperform the market in the near future because the outlook for refining margins isn’t too bright.

Analysts say gross refining margins could at best be in the region of $56per barrel in the current year. Moreover, prospects for the petrochemicals business too aren’t expected to look up until next year, they point out.
source - BS

While the management has clarified that the merger will be tax neutral— the carry forward unabsorbed depreciation of RPL cannot be set off against RIL’s profits — the alleged losses of around Rs 8,000 crore posted by RIL’s retail business will now be part of a much bigger balance sheet. With earnings per share (eps) for the combined entity estimated at around Rs 127 in 2009-10, the stock at Rs 1,225 levels, trades at just under 10 times. However, the merged entity has a slightly bigger exposure to refining and while gross refining margins (GRM) have strengthened in the region, moving up to around $5.5 abarrel in the last couple of months, the near -term outlook is not too positive. Of course, RIL will post better GRMs than its peers thanks to the fact that its refinery can process cheaper and heavier crude oil.
Nevertheless, until the global economy shows signs of recovering, the additional refining capacity coming into the market, especially in Asia, could keep GRMs in check.
source - BS

Reliance Industries Ltd (updated - 25 July 2009)
With gross refining margins (GRMs) coming in at $7.5 per barrel rather than the $8-8.5 per barrel that analysts had pencilled in, Reliance Industries’ (RIL) June 2009 quarter profit numbers turned out to be somewhat disappointing. The ebit (earnings before interest and tax) margin for the refining business, at just 4.4 per cent, showed a steep drop over the 9.4 per cent reported for the June 2008 quarter. Analysts point out that spreads for end products have narrowed over the past few months and, therefore, RIL too would have lost out. Typically, RIL’s GRMs have been significantly better than those for refiners in the region, which have averaged around $4.5 per barrel in recent months.

The reason RIL usually posts much better GRMs than those of its peers is its more complex refinery, which can process cheaper and heavier crude oil. The top line number, at Rs 32,056 crore, slipped 23 per cent, year-onyear and was more or less in line with what the Street had been expecting. However, though the effective tax rate was expected to be higher following the upward revision of the minimum alternate tax in the Union Budget, the bottom line came in somewhat lower than the consensus estimates.

In fact, with raw material costs lower, the total expenditure came down by about 26 per cent, as a result of which the ebitda (earnings before interest, tax and depreciation) margin was up nearly 400 basis points, limiting the drop in the operating profit. However, the ebit margin rose just 110 basis points to 13.4 per cent, thanks to the much higher depreciation provided at Rs 1,628 crore.

Analysts believe the performance should improve from here on after the Reliance Petroleum merger is completed and production from the KG-D6 basin is stepped up. However they believe that only a cyclical recovery in the petrochemicals and refining businesses can help sustain the growth momentum. The Street is also concerned about the court battle between the company and RNRL over the price at which gas should be supplied to the latter from the KG basin. At the current price of Rs 2013, the stock trades at just under 18 times estimated 2009-10 earnings and at a premium to many of its peers.
source - BS

Reliance Industries Ltd (updated - 04 Nov 2009)
Lower than anticipated gross refining margins (GRMs) pulled down the Reliance Industries (RIL)’s refining margins for the September 2009 quarter as aresult the company’s earnings fell 6 per cent yearon-year though they rose 5 per cent sequentially.

GRMs for the quarter were at $6 a barrel compared with $6.8 a barrel in the June quarter. However, the petrochemicals business did well posting strong volumes and margins going up 4 per cent sequentially.

What disappointed analysts was that the earnings before interest and tax for the exploration and production business, was up only Rs 200 crore sequentially despite an increase in revenues of Rs 1,100 crore and an estimated Rs 900 crore rise in the earnings before interest tax and depreciation (ebitda). Analysts are some what surprised at the cash flows for the first half of the year.

CLSA points out that cash flows appear to be lower than anticipated indicating sharply negative net working capital changes and loans and advances. Reliance’s net debt, it points out, has risen Rs 3,100 crore since March 2009, to Rs 51,900 despite 2,000 crore in favourable foreign exchange changes, Rs 2,900 crore from treasury stock sales and cash profits of Rs 12,500 crore against a capital expenditure of Rs 7,800 crore.

The stock has corrected in the last few trading sessions along with the rest of the market. While refining margins may not see a sharp uptick soon, a favourable judgement in the court case between the company and RNRL, on the supply of gas from the KG D-6 basin, would help. The street would of course, prefer some good news on the exploration front.
source - BS

Reliance Industries Ltd (updated - 24 Nov 2009)
The timing of Reliance Industries’ (RIL’s) nonbinding cash bid for bankrupt petrochemicals player, the $50.7 billion LyondellBasell, is accurate. With the petrochemicals cycle just about emerging from the trough, or perhaps still in there, asset prices would be somewhere close to the bottom. With fresh capacity expected to enter the market next year from the middle east, supply may continue to outstrip demand for another two years.

Moreover, industry watchers point out that petrochemicals producers in the middle east are quite competitive as they access gas at rates as low as $1 per mbtu. According to analysts, while demand is picking up, prices could remain sluggish and margins might fall even further from the current levels. They are also cautious about the operational synergies from such a downstream acquisition, pointing out that Reliance hasn’t really run a global operation of this size, with 50 manufacturing sites across 20 countries, even if it enjoys a tremendous track record when it comes to implementing big projects at home.

No one doubts that Reliance will get itself a good bargain, as it may negotiate shrewdly. Besides, it would be in a position to pay in cash, given the cash balances of close to $4 billion, and so would be able to clinch the deal at a better valuation than other bidders. Apart from the discounted value of the debt on LyondellBasell’s balance sheet, Reliance would take note of the fact that the petrochemical major has facilities in Europe and North America, and therefore, it could take time before they become more financially efficient.
Some of the manufacturing facilities, analysts point out, use naphtha as feedstock. Reliance would take these factors into consideration while trying to achieve the larger objective of building scale.
The company’s idea is to try and get a bigger share of the global market. LyondellBasell is the world’s third largest petrochemicals company, while Reliance has a global market share of about 8 per cent; though its share in the home market is 60 per cent. Reliance can also leverage the global firm’s distribution channels. Reliance’s petrochemicals business did well in the September 2009 quarter, posting strong volumes and margins which grew 4 per cent sequentially. It was the lower than anticipated gross refining margins (GRMs) which pulled down the overall refining margins. Consequently, the company’s earnings fell six per cent year-on-year, though it rose five per cent sequentially.