Reliance Industries - Integrated giant:: Macquarie Research,

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Reliance Industries
Integrated giant
Event
 The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's
largest private sector enterprise, with businesses in the energy and materials
value chain. The flagship company, Reliance Industries Limited, is a Fortune
Global 500 company and is the largest private sector company in India; with
activities spanning E&P, petroleum refining and marketing, petrochemicals
(polyester, fibre intermediates, plastics and chemicals), textiles, retail and
special economic zones. Its new forays include multiple shale gas JVs in the
USA and pan-India wireless broadband.

Impact
 Capex of US$20bn lined up: Petchem business has plans of Rs120bn capex
for polyester (0.5m tpa PET, 0.4m PFY, 2.2m PTA, 1.3m Px) and Rs200bn for
a 1.4m tpa cracker (+downstream). (Zero date for building facilities has
started. Polyesters shall start over the next 18-30 months and ethylene in four
years). We also expect Rs100bn+ pa to be spent on upstream, ~Rs100bn pa
on shale in addition to broadband, retail and petcoke gas plans. Funding is
expected through ~Rs700bn pa internal cash flows and debt for the rest.
 Diversification in recent past: RIL has recently diversified into telecom
through obtaining a pan-India WiMax license for US$2.75bn in the BWA
auctions; which has not been received favourably by investors.
 Shutdowns/delays: The KGD6 ramp-up to 80 mmscmd has been delayed as
the company is testing the reservoir. A shutdown in the PMT fields since July
20 has also hurt RIL’s earnings from gas sales. Also, a scheduled
maintenance shutdown for 3-4 weeks from the last week of October at the
Jamnagar refinery will reduce throughput by ~0.24mbpd.
Action and recommendation
 We believe that the markets have overreacted to the unrelated diversifications
by RIL, and have penalized the RIL stock far beyond merit. Further, we think
that the gap between perception and ownership (as gauged by our recent
investor survey) of the stock is too large and shall be filled in soon, as many
investors are currently ‘sitting on the fence’ and awaiting positive news flow.
 A revival in GRMs and stabilization of petchem margins provide an indication
of a cyclical upturn. RIL partner Niko resources’ Chairman also made
statements regarding the potential of MN-D4 (100 TCF resources possibly),
NEC-25 (6 new finds this year) and possibility of a KGD6 ramp-up in volume
and price as well.


Reliance Industries Aide Memoire
1. Refining margins have risen quite sharply; does the company believe they are sustainable and not peaked out?
2. What is the company’s view of petrochemical margins?
3. What is the company’s strategy for unrelated diversifications (like telecom/broadband) going forward?
4. What is the status of the KGD6 ramp-up, and how soon can the next stage of volume growth be expected?
5. Is there a scope for re-pricing of KGD6 gas?
6. What is the usage of gas in the refinery/petrochemical plants currently, and how much more can be expected?
7. What are the company’s drilling plans in the near future in Indian blocks?
8. Regarding the US Shale gas acquisitions, how significant a contributor to overall profits will Shale gas be?
9. With ONGC drilling the maiden shale gas well in India recently, how does RIL expect the shale gas scenario in India to pan
out with respect to auctions, technological prowess, pipeline connectivity and gas pricing?