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India Equity Research Reports, IPO and Stock News
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Economic Times (ET) carries reports on RIL based on an interview with the CEO, Mr
Mukesh Ambani. These offer interesting insights, but are unlikely to make any significant
difference to our or the market's view on the stock
KG-D6 gas production
Mr Ambani's statement: RIL will cautiously analyse data for a few quarters with the help of BP
before boosting production because quick-fix remedies can damage the reservoir (no specific
numbers mentioned). The company had observed deviations in reservoir behaviour and given
the complexity as well as the challenging deepwater environment, the company was bound to
take a cautious approach. Mr Ambani also stressed the extent of risk that is inherent in the
E&P business as government was only a partner in the profits while RIL was the sole risk
taker of risk and loss.
RBS comments: In our view, the main risk is that the regulator (DGH) does not seem to agree
with RIL's assessment and there is no past precedent on how disputes between DGH and
private operators can be sorted out. It remains to be seen to what extent DGH will go to
enforce its view, if they continue to differ with those of RIL.
Gas pricing
Mr Ambani's statement: Mr Ambani stated that "I think that ultimately all gas prices, including
D6, the ONGC/GSPC discoveries or those from ONGC's old fields, will have to be market
determined. Any attempt to reduce the subsidy bill through prices goes against the principle of
maximizing benefit to the parties of the PSC. Market related pricing is not a principle that can
be tampered with under the PSC."
RBS comments: In our view, while the demand for pricing deregulation is understandable, the
gas pricing issue is related to the issue of gas utilization (giving priority to fertilizer/power
plants) where the Supreme Court has ruled overwhelmingly in favour of government
regulation. In fact, RIL press release post the judgement states that "the judgement of the
Hon'ble Supreme Court has set at rest numerous issues which had been raised in relation to
the gas discovered and produced by RIL from the KG-D6 field. RIL sincerely hopes that the
clarity of findings of the judgement brings to a permanent closure the incessant distortion of
facts and malicious allegations which are being levied against the government's policies of
regulating and developing the natural gas sector for the greater good of the people of India
and in the interest of nation's energy security."
Investments in petrochemcials
Mr Ambani's statement: RIL would invest US$10-12bn in petrochemicals including in rubber
chemicals.
RBS comments: These investments are already known. Main issue is that currently only
US$3bn of these investments are in execution stage whereas for the rest, the zero date of the
projects (like a new cracker) is yet to be announced.
Two broad businesses- energy & consumer
Mr Ambani's statement: RIL will have two broad businesses: energy and consumer, with the
latter including businesses like retail, financial services, the telecom operations and even
sports ventures like the IPL cricket franchise.
RBS comments: While the investments in retail and telecom have already been made,
financial services is likely to emerge as the new industry where RIL could be focusing its
attention. A large acquisition announcement in this space over next 12 months could be quite
likely in our view. We have been surprised over the lack of announcements in the power
segment where RIL had talked of transformational initiatives at the AGM in June 2010.
Use of cash
Mr Ambani's statement: It's important to keep the balance sheet capability to do this stuff but
we shouldn't be in a hurry. We should feel absolutely safe that we are not going to hurt
ourselves. And we'll never do it for ego's sake. Our watchword is: does it generate value for
our shareholders on a sustainable and long term basis?".
RBS comments: Most investors would agree with these comments but perhaps still wish for a
hike in the dividend payouts ratio (12%).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economic Times (ET) carries reports on RIL based on an interview with the CEO, Mr
Mukesh Ambani. These offer interesting insights, but are unlikely to make any significant
difference to our or the market's view on the stock
KG-D6 gas production
Mr Ambani's statement: RIL will cautiously analyse data for a few quarters with the help of BP
before boosting production because quick-fix remedies can damage the reservoir (no specific
numbers mentioned). The company had observed deviations in reservoir behaviour and given
the complexity as well as the challenging deepwater environment, the company was bound to
take a cautious approach. Mr Ambani also stressed the extent of risk that is inherent in the
E&P business as government was only a partner in the profits while RIL was the sole risk
taker of risk and loss.
RBS comments: In our view, the main risk is that the regulator (DGH) does not seem to agree
with RIL's assessment and there is no past precedent on how disputes between DGH and
private operators can be sorted out. It remains to be seen to what extent DGH will go to
enforce its view, if they continue to differ with those of RIL.
Gas pricing
Mr Ambani's statement: Mr Ambani stated that "I think that ultimately all gas prices, including
D6, the ONGC/GSPC discoveries or those from ONGC's old fields, will have to be market
determined. Any attempt to reduce the subsidy bill through prices goes against the principle of
maximizing benefit to the parties of the PSC. Market related pricing is not a principle that can
be tampered with under the PSC."
RBS comments: In our view, while the demand for pricing deregulation is understandable, the
gas pricing issue is related to the issue of gas utilization (giving priority to fertilizer/power
plants) where the Supreme Court has ruled overwhelmingly in favour of government
regulation. In fact, RIL press release post the judgement states that "the judgement of the
Hon'ble Supreme Court has set at rest numerous issues which had been raised in relation to
the gas discovered and produced by RIL from the KG-D6 field. RIL sincerely hopes that the
clarity of findings of the judgement brings to a permanent closure the incessant distortion of
facts and malicious allegations which are being levied against the government's policies of
regulating and developing the natural gas sector for the greater good of the people of India
and in the interest of nation's energy security."
Investments in petrochemcials
Mr Ambani's statement: RIL would invest US$10-12bn in petrochemicals including in rubber
chemicals.
RBS comments: These investments are already known. Main issue is that currently only
US$3bn of these investments are in execution stage whereas for the rest, the zero date of the
projects (like a new cracker) is yet to be announced.
Two broad businesses- energy & consumer
Mr Ambani's statement: RIL will have two broad businesses: energy and consumer, with the
latter including businesses like retail, financial services, the telecom operations and even
sports ventures like the IPL cricket franchise.
RBS comments: While the investments in retail and telecom have already been made,
financial services is likely to emerge as the new industry where RIL could be focusing its
attention. A large acquisition announcement in this space over next 12 months could be quite
likely in our view. We have been surprised over the lack of announcements in the power
segment where RIL had talked of transformational initiatives at the AGM in June 2010.
Use of cash
Mr Ambani's statement: It's important to keep the balance sheet capability to do this stuff but
we shouldn't be in a hurry. We should feel absolutely safe that we are not going to hurt
ourselves. And we'll never do it for ego's sake. Our watchword is: does it generate value for
our shareholders on a sustainable and long term basis?".
RBS comments: Most investors would agree with these comments but perhaps still wish for a
hike in the dividend payouts ratio (12%).
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