Reliance's D6 gas lights up idle capacity

With the Reliance Industries Ltd (RIL) operated KG-basin D6 block gas flowing in, the gas-based power generation across the country has registered a healthy turnaround.

In October, a total of 15 gas-based stations recorded a plant load factor (PLF) of over 80 per cent due to improved fuel availability, as against around just 50 per cent last year.

The spurt in gas-based production has more or less compensated for a dip in hydro generation in the northern and eastern regions, where reservoir storage was 35 per cent and 33 per cent respectively below last year's levels.

Increased generation by gas stations, especially those in the south, have also come at a time when coal-based generation at a number of stations, including key NTPC ones, have faltered due to a botched-up coal tender.

Domestic natural gas production in April-October period was up 31 per cent at 25.389 bcm (billion cubic metres). Reflecting the jump in gas production, generation in gas-based plants shot up 34 per cent during April-October. “Surplus is also available due to low offtake by other sectors. The utilisation of the surplus gas has resulted in better utilisation of idle capacity,” an official with the Central Electricity Authority said.

A look at the region-wise operation efficiencies shows that the plants in south India had a PLF of over 71 per cent during April-October this year, as against 50.05 per cent year-on-year. The corresponding figures for the western region were 63 per cent and 57 per cent, while for the north it was 74 per cent versus 64 per cent.

Source: Hindu Business Line

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RIL's Bid for LyondellBasell - A Compelling Opportunity

By making a bid for LyondellBasell’s assets, Reliance seems to be getting serious about the global petrochemicals business.

When Reliance Industries sold treasury stocks of Rs 3,188 crore in September 2009, analysts were suggesting that the company would invest the proceeds in a global acquisition. These expectations do not seem unfounded now. Not even a week had elapsed since Reliance Industries’ Annual General Meeting that things started rolling as the company firmed up its plans to acquire a controlling interest in the bankrupt petrochemicals company LyondellBasell Industries (LBI).

LyondellBasell was created from a merger of Basell and Lyondell in 2007. Basell was the one of the largest chemical companies situated in Europe, and is one of the largest producers of polypropylene and polyolefins products. Lyondell was one of North America's largest producer of chemicals and plastics, and a refiner of heavy and sulphur crude oil. Although it’s still premature, the big-ticket investment is termed as the most expensive buy-out done by an Indian company, valued at about $10-12 billion or around Rs 50,000 crore. The deal, if it goes through, would create a global energy and chemicals giant with nearly $ 75-80 billion in combined revenues, which is more than twice RIL’s FY09 revenues.

What’s in it? 


With LBI’s revenues of $50.7 billion, being almost five times that of RIL’s petrochemical revenues, the acquisition has the potential to make RIL a leading global petrochemical company. The deal comes at a time when asset valuations in the Western markets are relatively lower as the global economy would need more time to come out of the woods completely.

Deepak Pareek, analyst, Angel Broking, “On account of a global economic slowdown and the decline in margins in the petrochemical segment, there has been a steep decline in replacement costs and asset values. Hence, the timing of the deal seems fair from a valuation perspective. With this backdrop, RIL is likely to press hard for an attractive bargain, which, in turn, could mean even better valuations.”

At cheaper valuations, buying a facility would make more sense for RIL compared to setting up a new plant as it would involve a long gestation period and higher opportunity cost. So strategically, a purchase like LBI is perfect.

With LBI, RIL can grow from a dominant domestic petrochemical player to an important global player though it is difficult to ascertain a specific figure in terms of market share increase as both companies are present in diverse products. Besides, the acquisition would allow it to gain access to LBI’s main markets of the US and Europe. With LBI being a technology-leader in polyolefins, the acquisition would enhance RIL’s technological advancement in RIL’s domestic operations. As a combine, both companies could enjoy a global monopoly in the polypropylene and polyethylene segments.

However, Vishwas Katela, analyst at Anand Rathi Securities, cautions: “A global acquisition of the size of  LBI would mean that RIL will have to manage operations not across few countries, but across continents.”

Another big difference is that RIL uses the cheaper natural gas route, and enjoys better margins, while LBI’s plants primarily use oil-based feedstock. This could pull down the blended margin as a combine. To an extent RIL can tackle this problem and create cost efficiencies, by shutting down LBI’s high-cost commodity chemicals and plastics facilities in the West and outsource it to the Indian facilities.

The right price

With this acquisition, RIL will have to contend with a company that carries a substantial debt of over $20 billion from a leveraged buyout done earlier. The massive debt deteriorated LBI’s financials and along with weak petrochemical margins in the second half of 2008, questions were raised on the survival of the third largest petrochemical player in the world. Subsequently, LBI had to file for bankruptcy protection under Chapter 11 in January 2009 to restructure its debt. At the end of September 2009, LBI has $22 billion in liabilities, with around $12 billion subject to compromise. This includes about $8.1 billion of its debtors-in-possession bankruptcy loan, which is a loan available to bankrupt companies at favourable terms. LBI needs to repay this loan by December 2009. To come out of bankruptcy, LBI is considering several non-binding equity financing offers including RIL’s offer.

Obviously, trying to estimate what value RIL will ascribe to LBI is a multi-billion-dollar question. There is consensus that LBI‘s enterprise value could be in the range $10 to 12 billion. On sizing up the probable deal, Jal Irani, head of research, Macquarie Securities, says, “Large global chemicals companies quote at an enterprise value/earnings before interest, tax and depreciation (EV/EBITDA) multiple of about 10 times and the US-based pure refiners quote an EV/EBITDA of 9 times. Applying these multiples to LBI’s annualised EBITDA (2009E), we get an EV of $20 billion. On the other hand, since LBI’s net worth is negative, the entire value lies in the $25 billion of outstanding debt. LBI’s bonds are quoting an average 50 cents to a dollar, implying an EV of $12.5 billion.” However, we cannot rule out a possibility of RIL attaching a premium to LBI as the opportunity is impressive in terms of size, product segments as well as geographical diversification.

Funding the purchase

Although the exact contours of the deal are not known, most of the stake that RIL proposes to buy would be in cash. The question is, does RIL have the wherewithal. RIL has cash worth $ 4.9 billion (about Rs 23,000 crore) and around $ 8 billion (Rs 37,000 crore) in treasury stock. Thus, RIL has the required amount in its books to make a cash offer. Crisil observes, “RIL’s majority ownership in LBI could get funding without any additional debt on the books of RIL or that of its consolidated group companies. Existing cash and sale of treasury stock will be used for the purpose of funding the acquisition.”

Crisil further adds that RIL’s gross debt to equity ratio would not exceed 0.75 times during the deal process. With RIL’s gross debt-to-equity at around 0.6, gives enough scope for RIL to further leverage its book and borrow another $3-4 billion

The funding might not be an issue. But the deal is not likely to be closed in a hurry -- the courts are expected to deliver the verdict on the fate of LBI’s restructuring in February 2010. So other potential bidders still have time to throw their hat in the ring to communicate their interest in the distressed company.

Outlook

This deal could be value accretive. This is why, at an enterprise valuation of $12 billion and an EV/EBITDA multiple of 5 (compared to average peer value at 8.6 and RIL at 9.6), could deliver an additional earnings per share of around Rs 25.5 in 2011. With RIL projected to deliver an EPS of around Rs 157, the value accretion is about 16 per cent.

As far as the other bidders are concerned, a higher proportion of the cash drain and monopoly issues could act as a hindrance for American companies. For Chinese companies, their preference for upstream buy-outs compared to downstream might go in favour of RIL.

Operationally, Reliance’s petrochemicals business delivered better margins (around 17 per cent) in the first half of 2009, on the back of better domestic realisations and pick-up in volumes. RIL’s overall margins were down in H1 FY10 as gross refining margins halved to around 6-7 per cent compared to previous period. For the future, the ramp-up of gas production, incremental refinery volumes from Reliance Petroleum refinery and sustained petrochemical margins would drive the earnings growth.

The RIL stock has underperformed the broader indices since March (the Sensex grew 95 per cent, while RIL went up 70 per cent in this period). Experts believe the stock could be a market performer from now on. The stock is trading at around 18-19 times and 13-14 times, its estimated 2010 and 2011 earnings. It can be accumulated on dips.

Source: Business-Standard

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RIL reopens 900 oil stations, selling at PSU rates

The Mukesh Ambani-run Reliance Industries (RIL) has reopened about two-thirds of its 1,432 petrol pumps in the country and is selling about 2,000 kilolitres of auto fuel per day, RIL President (Refinery Business) P Raghavendran said today.

"We are selling about 2,000 kl per day from 900 petrol stations, mostly in the Western and Southern markets," he said here, adding at many of these stations, it is selling the fuel at rates on par with the heavily subsidised price of its public sector rivals.

Reliance had shut its 1,432 filling stations in March 2008 after sales dropped to almost nil as it could not match the subsidised price offered by the government-owned IndianOil, Bharat Petroleum and Hindustan Petroleum, who got compensated from the government for selling fuel below cost.

"We are selling where we can match PSU price," he said.

The three state-run retailers sell petrol at Rs 3.85 a litre lower than cost of production and diesel at Rs 3.71 per litre lower.

Raghavendran said we are the only nation that is so heavily dependent on imports to meet oil needs yet subsidies the fuel heavily.

Unlike sectors like fertilizers, the oil subsidy is limited only to public sector firms, he said, and pointed out that in the 2008-09 fiscal, the government issued oil bonds worth over Rs 103,000 crore to PSU fuel retailers for selling petrol, diesel, domestic cooking gas and kerosene below cost.

The model of permanently adopting such a large subsidy programme is not sustainable for the economy, he said.

Reliance surrendered its only-for-export status for one of its refineries in Jamnagar which is now being used to supply fuel to its outlets.

Essar Oil, which used the sliding oil prices since October 2008 to reopen 1,292 out of its 1,316 petrol pumps and is planning to add another 1,500 in next one year, is also selling fuel at almost the same rates as PSU rates.

IOC, BPCL and HPCL get bonds from the government and discounts from crude producer ONGC for selling petrol, diesel, domestic LPG and kerosene below cost. The same compensation is not given to private retailers like Reliance, Essar and Royal Dutch Shell, he pointed out.

Source: www.business-standard.com

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RIL: Adding downstream assets

The LyondellBasell acquisition will undoubtedly catapult the company into the big league.

The timing of Reliance Industries’ (RIL’s) non-binding 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.

Source: Business Standard

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Direct tax Code:Can farm-in costs be amortised?

Despite attempts by the industry to seek clarification on the tax treatment of farm-in costs, there is not much guidance available to date.

Farm-in transactions are unique to the exploration and production (E&P) sector since mineral oils embedded in a particular territory in their natural habitat are the property of the State/Central Government in whose territory/jurisdiction they rest.

As such, no person other than such State/Central Government can carry out the exploration and extraction of mineral oil unless a right to explore and extract mineral oils from the specified areas is granted by the State/Central Government.

Such exploration rights typically rest with the company(ies) which enters into a Production Sharing Contract (PSC) with the Government and can be wholly or partly assigned and transferred to other companies subject to approval from the Government.

(Farm-in is “a transaction under which an incoming (farm-in) party earns an interest in a contract from an existing (farm-out) party to the contract in return for a consideration which may be payment of some or all of the farm-out party’s share of costs relating to the contract,” defines a glossary entry in www.emeraldenergy.com .)

Transfer of rights

It is very common in the E&P sector for the existing parties of the PSC to transfer such exploration rights through farm-out transactions. The acquisition of exploration rights may either be in the form of equity buyout or asset purchase. In case of an equity buyout, the purchase cost of shares of the entity is not amortisable, and thus, the cost of acquisition is locked until the shares are sold.

In case of an asset purchase, the tax treatment of the acquisition/farm-in cost has not been provided either in the Income-Tax Act, 1961 or in the Model PSC.

Despite several attempts by the industry to seek clarification on the tax treatment of farm-in costs, there is not much guidance available to date, resulting in a dispute between the industry and the tax department. Even the proposed Direct Taxes Code Bill, 2009 does not categorically provide for the treatment of farm-in costs leaving open the possibility of dispute with the tax authorities on this account.

In the absence of specific provision relating to the taxability of farm-in costs, under the current tax regime and depending upon the facts of the case, E&P companies have been resorting to three possible alternatives for claiming the farm-in costs: as revenue expenditure incurred for the purpose of business under Section 37 of the I-T Act; or as exploration expenditure in accordance with Section 42 of the I-T Act read with the PSC; or as depreciation on intangible assets being licence or business or commercial rights of similar nature to that enumerated under Section 32 of the I-T Act.

The Revenue’s stand

However, the revenue authorities do not allow the claim of the farm-in costs either as revenue expenditure or as depreciation. The revenue authorities reject the claim of farm-in costs as revenue expenditure under Section 37 on the ground that the specific section, that is, Section 42 of the I-T Act, is applicable to E&P companies to claim the deduction of expenditure. Hence, a deduction for such expenses under any other section is not allowable.

At the same time, the revenue authorities do not accept the claim under Section 42 by contenting that the exploration expenses are actually incurred by the farmer-out and the essence of the farm-in transactions essentially is to transfer the participating interest from one party to another.

Even cases where the farmer-in has merely reimbursed the exploration costs have not found favour with the tax authorities. While disallowing the claim of depreciation, the revenue authorities do not take into account that the exploration rights granted by the Government are in the nature of licence.

It may be noted that such exploration rights entail exclusivity to the holder of such rights over the exploration and production operations from a particular block and the assignment/transfer of such a licence gives a right to the farmer-in, which should be recognised as a licence eligible for depreciation.

It is important to note that the licence is specifically covered as an intangible asset eligible for depreciation under Section 32(1)(ii) of the I-T Act. In any case, if not a licence, it should at least be recognised as a “business or commercial right” in the nature of licence, which again is eligible for depreciation. The position of the revenue authorities however has been that since the scope of the intangible assets eligible for depreciation is restricted to the assets which represent intellectual property rights, farm-in costs are not eligible for depreciation.

The contention of the revenue authorities appears to be incorrect as intangible assets eligible for depreciation also include trademarks and franchises, which may or may not include intellectual property rights.

The fact that the expenditure for acquisition of exploration rights has been incurred exclusively for the purpose of the business cannot be disputed. Thus, this expenditure deserves to be allowed within the start and finish line of business cycle. The position of the revenue authorities, however, has led to an anomaly, leading to permanent disallowance of the farm-in costs and resulting into unnecessary litigation. This anomaly since has put a question mark over the tax treatment of the farm-in costs, cause considerable financial hardship to the farmer-in.

The high tax costs result in farm-in transactions becoming uneconomical. The interpretation by the revenue authorities makes acquisitions less competitive in E&P sector, which is not in the country’s interest. India needs to encourage exploration of its vastly unexplored basins to increase its domestic oil and gas production to achieve better energy security, which is critical to its growth and economic development. Thus, a clarification in this regard is extremely critical.

Delhi ITAT

The question of whether the farm-in costs is amortisable has been answered for the first time by the Delhi Income-Tax Appellate Tribunal (ITAT) in its very recent ruling which is worth noting by all the upstream oil and gas companies. The Delhi ITAT, in the case of a key player engaged in oil and gas E&P activities, held that the commercial rights of exploration of mineral oils as acquired by the assessee falls under the expression of any other business or commercial right of the nature similar to licence as stipulated in Section 32(1)(ii).

The right has been granted to the assessee by way of licence and the assessee became owner of such right, that is, licence to have an access and to carry on the business of exploration and development of mineral oils. The ITAT has accordingly allowed the claim of the assessee of depreciation on the farm-in cost, based on the facts of the case.

Though the Delhi ITAT decision has provided some assurance to the E&P companies to reduce the financial hardship, it is still not conclusive and subject to challenge by the revenue authorities in the higher courts. It is highly desirable that the revenue authorities accept the decision and put a rest to the controversy. If the revenue authorities choose to challenge the decision, the matter would remain uncertain.

The Central Board of Direct Taxes or the Finance Ministry should issue appropriate clarification regarding the timing of the claim of such costs. Until then, the E&P companies should watch out and undertake adequate planning before giving effect to the farm-in costs in their tax returns.

Source: Business Line

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Analysts Remarks on RIL

CLSA maintains outperform on Reliance Industries

CLSA has maintained its Outperform rating on Reliance Industries after the company announced its plans to make a non-binding cash offer for all the assets of LyondellBasell (LB), the world’s largest polymer producer. 

“LB filed for bankruptcy in early 2009 under its US $ 24bn debt load after market conditions deteriorated in late-2008, which saw it almost run out of cash. LB filed a plan for reorganisation in September 2009 to emerge out of bankruptcy in early 2010; this broadly seeks to transfer LB to its creditors in lieu of extinguishing about US$18bn of its pre-bankruptcy debt. While the specifics of Reliance’s offer are unknown, it offers an alternative for LB to pay off its creditors in cash and gives Reliance a controlling stake. This initial offer opens up data-rooms for detailed due diligence after which we expect Reliance to make a firm offer; this will need to be approved by the bankruptcy court and two-thirds of creditors - the process should take six months.

KIM ENG maintains ‘Buy’ on Reliance Industries

KIM ENG India has maintained ‘Buy’ call on Reliance Industries even as the company has announced plans to acquire LyondellBasell. 

“Reportedly, Reliance Industries may pay between US$6bn to US$12bn for Lyondel. We do not expect a deal in the near term, given lots of red tape involved and a due diligence of assets, which has not yet begun. Others bidders include Sinopec of China and several large private equity companies. Our BUY rating for the stock is supported by FY10F EPS growth of 20% following from increasing gas sales,” the update note said. 

Source: CLSA and KIM ENG Research Reports

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Reliance Industries Ltd AGM takeaways:

 Reviving paused projects: RIL’s CMD Mukesh Ambani outlined the

company’s future thrust areas in his annual address to shareholders at

the AGM. With the successful completion of refinery expansion and

KGD6 development, RIL plans to refocus on earlier announced

initiatives (petchem, retail) which had been on the back burner over

last two years.

 Petchem expansion back on the agenda: Initially announced in 2007,

the project envisages using cheaper refinery off-gases as feedstock for

a 2mMTPA olefin capacity with downstream linkages. RIL also

revived plans for building a synthetic rubber plant (750ktpa capacity

mooted in 2005). The speech also talked of overseas acquisitions being

an option to achieve world class scales in the business.

 Services/Retail initiative: RIL had slowed investment in the retail

business over the last year. The CMD reiterated management’s

commitment to invest in and grow this business as part of a broader

thrust to increase service offerings.

 E&P - Accelerated efforts on exploration: RIL had been utilizing its

drilling resources for the development of KGD6 resulting in slower

exploration efforts. RIL is working on a development plan for the

KGD6 satellite fields and will accelerate exploration efforts.

 Renewable energy, rural initiatives: RIL plans to invest in pilot

projects in bio-diesel, solar energy. In our view, RIL’s rural initiative

will be aimed at strengthening the back-end for the retail operation.

 Looking to use the downturn…Given its strong cash flow outlook

and balance sheet strength, RIL is looking to add capacities using the

economic-slowdown-induced slackness in the construction chain (new

capacities) and lower asset valuation (inorganic opportunities). Clarity

on capex and timelines for the organic growth projects should emerge

over the next few quarters.

Source: JP Morgan Report

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LyondellBasell development positive for RIL: Says PN Vijay

In an interview with CNBC-TV18, Portfolio Manager PN Vijay, spoke about his reading of the market and his outlook on LyondellBasell. As per PN Vijay, LyondellBasell development looks like a fairly positive development in the sense that over the last couple of years the petrochemical business of the company has been getting minor, which is a worry because they are very strong players in petrochemicals. This particular move should assuage the concerns of investors on that business. Also when the treasury stock was sold, there was quite a bit of hulla-bulla etc and the management kept saying this is a precursor for some global acquisitions. So they are keeping to their word which is mild positive. 

Reliance has been sort of doing well in the last two weeks compared to the battering it received since June. 

“They are talking about war chest of USD 6-7 billion so about 3-4 mezzanine debt taken overseas would not impair the debt equity too much. This could be a leverage buyout (LBO) also in the sense that the cash flows for the debt could be coming from the predebted company. I don’t know – I am not very sure about the cash flows. I can see your reservations, for example Corus and these types of acquisitions whether we see huge cash drain on the Indian predator. But Reliance is very smart when it comes to its funding. They get it all normally right. But it is an issue – no doubt.” Says PN Vijay.

Source: As Reported to CNBC 

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RIL again tops valuable brands chart

In a year marred by the global financial crisis, stock market volatility and cost-cutting all around, India Inc has managed to retain a tally of 19 homegrown companies with a brand value of more than $1 billion each.

With just one company slipping below that mark — last year there were 20 companies with a brand value of more than $1 billion — the latest edition of India’s Most Valuable Brand 2009 (IMVB) study gives a sense of déjà vu with the Top 10 league carrying all the labels from last year’s list, led by Reliance Industries yet again.

The study was carried out by Brand Finance, a London-based global brand valuation firm, exclusively for The Economic Times.

Using the relief-from-royalty method of brand valuation, which assumes that a company does not own its brand and needs to license it from a third party, Brand Finance India’s Top 50 Most Valuable (Company) Brands, 2009, was drawn up from consumer-facing corporate brands listed on BSE. The study left out holding companies such as Hindustan Unilever that own a portfolio of branded business.

All top 10 brands from last year’s list have maintained their place in the roster, albeit with a minor reshuffle in positions.

Reliance Industries consolidated its position as the most valuable brand with a 15% jump in its brand value to $7.8 billion, followed by the country’s largest bank, State Bank of India, which climbed two spots with a 30% spike in brand value at $5.5 billion.

Last year’s No. 2, Tata Consultancy Services (TCS), swapped places with the state-owned bank as Indian Oil Corporation retained its third position.

Information technology was among the sectors impacted the most by the global recession, with global clients slashing their IT budgets and driving hard bargains with vendors. Besides TCS, Wipro and Infosys too saw their brand value drop this year.

ICICI Bank, India’s top private sector bank, saw its brand value rating slip three slots to 10. While the global recession has caused significant declines in global enterprise

values, some commentators had suggested that the current economic climate would lead to a collapse in the value of brands because they are seen to be an unnecessary luxury.

Also, in their bid to control the damage, most companies slashed their expenses, particularly the spend on advertisements and brand-building. But the Brand Finance IMVB study indicates that so long as brands continue to reinvent and deliver good value for money, they will do well. Overall, the IMVB Top 50 list doesn’t show any upheaval in last year’s line-up, with only three new entrants into the list compared with 11 last year.

A sectoral analysis shows while the top brands are evenly spread out across sectors pretty much like last year, manufacturing has emerged as a big force this year. Thanks to automobile and steel, manufacturing ruled the list with as many as 20 brands.

The Top 50 list points to the declining influence of companies from the banking and finance services sector that sent nine brands into the list.

Warren Buffett once remarked that “you only know who’s swimming naked when the tide goes out”. Well, the tide has gone out. “Banks, insurance companies and ratings agencies were the first to be found out,” says Unni Krishnan, MD of Brand Finance India. He believes that the next two to three years will challenge companies to introspect about the sustainability of their most prized assets-reputation and stakeholder value.

Yet for all its very real economic pain, within this global crisis there is an opportunity for Indian companies with a long-term value-building agenda. The crisis acts as a great stimulant for change, to innovate and spot robust growth opportunities amidst the rubble
Source: Economic Times

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RIL eyes overseas buys for growth

Mukesh Ambani, chairman of India’s biggest firm, Reliance Industries
(RIL), indicated on Tuesday that an overseas acquisition might be on the cards.

There has been widespread speculation about a possible buy of LyondelBassel, a bankrupt Rotterdam-based petrochemical company. The company would scale up its current businesses and may acquire new ones, Mr Ambani said.

The meeting approved the long-awaited bonus shares and the shareholders were told that their company was poised to grow with increasing oil and gas
assets and the financial strengths to expand businesses. RIL fixed November 27 as the record date for distribution of bonus shares

“Reliance envisages multi-fold growth in the near-term, with a far more widespread global footprint,” Ambani said in his speech, but did not elaborate on his plans.

The company has a current cash balance of Rs 19,421 crore or $4 billion and net debt is less than 21 months of cash flow, he said.

Mr Ambani said that RIL could become debt-free in less than two years. India’s richest man, representing the biggest shareholder family, skipped the usual multi-hour question-answers session, after acrimony among shareholders on allegations that one of them was beaten up by security guards created a din. But in his prepared speech he said the “best of Reliance is yet to come.”

“This is the first time in the history of RIL, that shareholders were unanswered,” said Shailesh Mehta an RIL shareholder who has been attending the annual shareholder meeting for years.

Reliance Industries, with the largest number of shareholders among Indian companies of over 22 lakh, has been one of the most sought-after companies by investors with 25 per cent year-on-year returns for about three decades.

This year, it awarded bonus shares in the ratio of one-for-one as shareholders, mainly retail, were seeking it for years. Many years ago, its founder Dhirubhai Ambani, during a shareholder meet, dramatically called for a board meet to announce bonus shares.

There is no legal obligation on the chairman of a company to answer every shareholder question, say lawyers. RIL shares fell 0.65 per cent or Rs 14 to end at Rs 2133.75 in a flat market.

“In company law, there is no prescription that every question needs to be answered. It’s not illegal for a chairman not to answer shareholders queries. Every item needs to be voted and if 10 per cent of shareholders feel that there is an issue of any mismanagement, they can approach the Company Law Board.” said Akil Hirani, managing partner with Majmudar & Co.

At the time of going to press, Reliance had not responded to a questionnaire on the event.

Anticipating complications, RIL company secretary Vinod Ambani asked shareholders not to raise the gas pricing dispute with Anil Ambani, the estranged brother of Mukesh Ambani, since the matter was before the Supreme Court.

“It’s the chairman’s prerogative on whether to answer queries,” says Sujjain Talwar, partner, of Mumbai-based law firm, Economic Laws Practice.

“If the matters are sub-judice and he has been advised not to answer the queries on a public platform, he need not answer them. But the queries have to be directly related to the items on the agenda of the AGM.”
Source: Economic Times

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Mukesh Ambani lays out aggressive vision for RIL

Mukesh Ambani, chairman of Reliance Industries Ltd, India’s largest private company, today laid down a road map for business transformation and value creation for the company at its 35th annual general meeting.

Ambani said the company has lined up aggressive plans for oil and gas exploration work over the next three years, as it seeks to further strengthen its position in the energy business. It would include overseas acquisition. Reliance was working on developing nine gas fields around the Dhirubhai-1 and -3 gas discoveries, currently producing around 45 million standard cubic meters per day (mscmd) or 40 per cent of India’s total gas output. “Initial field development planning for accelerated monetisation of nine more gas discoveries in this block is underway,” Ambani added.

The company is also planning a new petrochemical complex at Jamnagar in Gujarat, with an annual capacity of two million tonnes of olefins and matching downstream capacities increasing the total capacity to four million tonnes.

Reliance began pumping gas from its find in the Krishna-Godavari basin off India’s east coast in April. “Gas production has crossed six billion cubic metres and the field is slated to plateau production by the second half of 2010. This production is from just three of the 19 discoveries in the area,” he said.

The Krishna-Godavari basin’s D6 block began oil production in September last year and is currently producing between 10,500 and 11,000 barrels of oil per day from three wells. Three more wells are to be added to more than double the output. “Oil production from the D26 (MA) field has been 2.8 million barrels (since production started) with daily peak production expected by the end of the year,” Ambani told the shareholders.

On November 10, RIL announced it had made its first oil discovery in the Cambay basin, Gujarat. “Reliance will continue to accrue oil and gas properties overseas to add to existing assets in Oman, Yemen, Colombia, East Timor and Peru,” Ambani added.

Reliance has a current cash balance of Rs 19,400 crore and its net debt is now at less than 21 months of cash flow, Ambani said.

As part of its corporate social responsibility intiative, he announced that the company would be setting up a Rs 500-crore Reliance Foundation to address the social development imperatives of the country. The corpus would be later increased to Rs 1,000 crore and would provide formal and vocational education, high-quality healthcare, rural development and urban renewal, and protection and promotion of India’s heritage of arts and culture.

Source: Business standard

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RIL AGM okays 1:1 bonus issue; Nov 27 is record date

The shareholders of the country's most valued company Reliance Industries (RIL) today approved the 1:1 bonus issue for which the company fixed November 27, 2009 as the record date.

In a filing to the Bombay Stock Exchange, RIL said the shareholders at the 35th annual general meeting today approved November 27, 2009 as the record date for determining the shareholders who will be entitled to bonus issue.

The RIL board had last month approved 1:1 issuance of bonus shares after a 12-year hiatus. The last time RIL announced a bonus issue was in October 1997.

 The company founded by the late Dhirubhai Ambani, credited for drawing retail investors to the stock markets in the 1970s, recommended an issue of one bonus share for every share held by shareholders, which the company felt would help unlock value.

"The proposal for bonus and dividend continue RIL's tradition of awarding shareholders on a sustained basis. If we look at our track record since we listed in 1978, our shareholders have got 25 per cent compounded return over these 31 years since RIL became a public company," RIL CFO Alok Aggarwal had said.

However, shares of RIL today shed 0.65 per cent to close at Rs 2,133.75 on the BSE, as the AGM failed to enthuse investors, who were expecting some big-bang announcements. The market as a whole had a choppy day, as Asian cues were not encouraging.

The RIL counter, which carries the most weight in the benchmark Sensex, has gained as much as 74 per cent so far this year from Rs 1,230.25 on December 31, 2008

Source: PTI

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Will incur heavy loss if K-G gas is not sold to priority customers: Govt

The government will incur a loss of Rs 75,000 crore if the gas from Reliance Industries Ltd’s (RIL’s) D-6 block in the Krishna-Godavari basin is not sold to priority customers like fertiliser and power sectors, additional solicitor general Vivek Tankha told the Supreme Court today.

Tankha and Mohan Parasaran, both additional solicitors-general, are government counsels in the gas supply dispute between the Ambani brothers. The government, through an Empowered Group of Ministers (EGoM), has allocated 90 million standard cubic metres a day (mscmd) of gas from the D-6 block to priority customers like power and fertiliser sectors, liquefied petrol gas extraction units, city gas distribution projects, petrochemical plants, steel units and refineries.

The government’s counsel based his arguments on the wide-spread impact the D-6 gas will have on the country’s economy. Tankha said the gas supplies from D-6, which started production in April, will help produce 7.6 million tonnes per year of urea and help save the government Rs 4,000 crore worth of subsidy annually. Similarly, D-6 gas will help generate 10,000 Mw of power, resulting in about Rs 11,000 crore savings per year, Rs 1,500 crore annual savings through city gas projects, Rs 1,000 crore savings to steel sector and Rs 3,000 crore to the refineries.

Mukesh Ambani-led RIL and Anil Ambani’s RNRL are locked in a legal battle over supply of gas, based on differing interpretations of validity of a memorandum of understanding reached between the two brothers in 2005 at the time they split their father’s industrial legacy.

The family pact said RIL would supply 28 mscmd of D-6 gas to RNRL for 17 years at $2.34 per mBtu, which is 44 per cent lower than the later government-approved price of $4.2 per mBtu. The government is opposed to the portion of the Ambani family pact that divides the entire gas from D-6 Block between RIL and RNRL.

Source: Business Standard

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RIL questions RNRL's demand for gas without plant

The Mukesh Ambani-led RIL today questioned in the Supreme Court the demand of brother Anil Ambani-led RNRL for the immediate supply of gas from the K-G basin, saying that it cannot be done in the absence of the proposed power plant as per the agreement reached between them.

There was an assurance given for the supply of gas, but the other side (Anil Dhirubhai Ambani Group) failed to establish the power plant. Now they want to make money out of the gas which was never contemplated in the demerger scheme,” Senior Advocate Harish Salve, appearing for RIL, said before a Bench headed by Chief Justice K G Balakrishanan.

Continuing his arguments in the high-voltage gas row, Salve said the assured supply of gas was the vital ingredient of the agreement for the power plant to be established by the RNRL at Dadri, near Ghaziabad in Uttar Pradesh.

“Therefore, no court can modify the scheme which they (RNRL) sought,” Salve submitted before the Bench, also comprising Justices B Sudershan Reddy and P Sathasivam.

RIL’s submission revolved around the question of a suitable arrangement for the supply of gas from the K-G Basin to RNRL. When the day’s hearing was about to conclude, RNRL’s Counsel Ram Jethmalani contended that seven of the affidavits filed in the apex court by RIL’s Directors relating to the family MoU of 2005 were not a part of the record when the dispute was heard in the Bombay High Court.

Jethmalani submitted that if RIL consents and the affidavits were allowed to be the part of the records then, under company court procedure, the seven directors were open to cross-examination in the court.

The Ambani brothers are locked in a bitter battle over the supply and price of the gas from the K-G basin. While RNRL is seeking gas at a committed price of $2.34 per million British thermal unit (mBtu), RIL says it cannot honour the commitment made in the family agreement due to government’s pricing and gas policies.

However, before the intervention by RNRL, Salve said the scheme of demerger provided that the gas has to be supplied up to the delivery point, after which it would be for the Anil Ambani-led Reliance Energy Ltd (REL) to transport the gas to its power plant.

“The suitable arrangement would be that RNRL take the gas from delivery point for REL. However, what they wanted is that, from the delivery point, RNRL would take the gas and market it,” he said, adding that “no court could grant such a relief to RNRL for taking the natural resource and making profit by marketing”.

RIL said supply of gas to RNRL at $2.34 per mBtu was not possible as it would have to make up for the loss from its own pocket.

Reports of my quitting incorrect: ASG Parasaran Meanwhile, Mohan Parasaran, the government’s counsel in the Ambani brothers gas dispute, has said that he had never threatened to withdraw from the case on the issue of inclusion of more lawyers in the team.

Additional Solicitor General (ASG) Parasaran last week wrote to Petroleum Secretary R S Pandey saying he had never threatened to withdraw from the case or resign as ASG on talks on including more lawyers in the government team, official sources said.

source: Business Standard

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RIL closes in on big-bang overseas acquisition

Reliance Industries (RIL), India’s largest private sector company by market capitalisation and sales, is close to announcing a major overseas.

If all goes according to plan, RIL is looking to do so before its annual general meeting on November 17, a source close to the development said.

The likely target is a part of the assets owned by troubled petrochemical major LyondellBasell, which is undergoing reorganisation under the protection of a US court. "The intent is certainly to make an announcement on the day of the AGM or very close to it but that depends on how the talks progress,” one person familiar with the transaction said.

A team of senior RIL officials is said to have been camping in New York since September, according to a senior banking source. All the people with direct knowledge of the deal who we contacted for this story spoke on condition of anonymity because the transaction had not yet been consummated.

ET spoke to a number of bankers and analysts to ascertain the possible size of the transaction. One banker said the transaction could be in the region of $6 billion and may include both the US and the European assets of LyondellBassell.

Earlier media reports had referred to a deal in the region of $3.35 billion for the company’s US assets. An external spokesperson of RIL, who responded by e-mail to ET’s questions, said the company was evaluating global opportunities. “Reliance Industries is reviewing a number of global opportunities for growth in its core business. The difficult operating environment of the past year has made available several interesting opportunities, where an investment

by a strategic operator of industrial assets can add substantial value.“

The review is on and there can be no assurance that any approach will be made with respect to the opportunities under review or that any such approach will result in a transaction.”

The spokesperson said he would not be able to elucidate further.

Jal Irani, head of research at Macquarie Securities, told ET the deal had synergies for RIL. "RIL will enjoy a lot of synergies if it acquires LyondellBasell. It will benefit from state-of-the-art technologies of LyondellBasell. Besides, its marketing and distribution network come in handy. LyondellBasell will provide a ready market for RIL and RIL may turn it around if it is able to source feedstock at a cheaper rate." He refused to comment on the size of the deal.

The fact that RIL may make a large buy outside India has been in the public domain for some time. In an interview with ET NOW last month, RIL’s chairman Mukesh Ambani had said that an overseas acquisition was one of the options as the company sought new growth opportunities after the completion of the Jamnagar refinery and the start of production of natural gas from the Krishna Godavari basin.

Maurice Bannayan, a senior official in RIL’s refinery business, had been recently quoted in agency reports as saying that RIL was considering overseas acquisitions in the US and Europe.

Mr Bannayan was speaking on the sidelines of a conference in Abu Dhabi. RIL may also be trying to diversify outside India, partly as a reaction to recent events in the country. The company’s top leadership, according to people familiar with their thinking, has become disillusioned by the uncertainty created by the prolonged litigation with Anil Ambani’s Reliance Natural Resources over the price and supply of gas from the KG basin and frequent changes in India’s tax regime.A senior RIL official who spoke to ET this summer expressed frustration and annoyance over the curtailing of tax benefits for pipelines carrying natural gas. An unlisted company which is part of the RIL Group is building a pipeline network to carry natural gas

from the KG basin off India’s eastern coast.

LyondellBasell had posted a loss of $7.3 billion on annual revenues of $50.7 billion. It has $27 billion of assets and $19 billion of debt. On Friday, the RIL scrip closed at Rs 1956, up 0.87%. RIL, the potential acquirer, is smaller. It had a profit after tax of $3 billion on a topline of $29 billion for the year ended March 31, 2009.

The RIL overseas acquisition buzz started getting louder after the company raised Rs 3,188 crore by selling its treasury shares recently. The company had cash reserves of $4 billion or about Rs 18,000 crore as on September 30.

LyondellBassell is the outcome of a number of mergers. Lyondell Chemical Company was earlier listed on the NYSE. It was the third largest chemical company in the US. In December 2007, it was acquired by Basell Polyolefins for $12.7 billion to create LyondellBasell — one of the world’s largest polymer, chemical and fuel companies. RIL has been eyeing the company after it filed for Chapter 11 under the US Bankruptcy Code in January 2009.

In May 2009, LyondellBasell Industries gained an additional owner in German investor Andreas Heeschen, whose firm ProChemie Holding has joined with LyondellBasell owner Access Industries to create ProChemie GmbH, a joint venture in which each side will own 50% equity in LyondellBasell. This deal was structured to give Access Industries flexibility to invest additional funds in LyondellBasell as part of the bankruptcy process, but without triggering unfavourable tax consequences for the company.

In September this year, the company submitted its reorganisation plan and disclosure statement to the US Bankruptcy Court to emerge from Chapter 11. The United States Bankruptcy Court for the Southern District of New York is administering this restructuring and reorganisation process.

As part of the Chapter 11 process, LyondellBasell obtained approximately $8 billion in debtor-in-possession (DIP) financing to fund continuing operations. The DIP financing includes two credit agreements: a $6.5-billion term loan (comprising $3.25 billion in new loans and a $3.25 billion roll-up of existing loans) and a $1.62 billion asset-based lending facility, according to media reports.

Bank of America-Merrill Lynch, Royal Bank of Scotland and Citigroup are among the lenders to the company, which obtained debtor-in-possession financing of $8.1 billion in February this year.

LyondellBasell is learnt to be offering a partial exit to these bank lenders by offering equity through a rights issue. Bank of America-Merrill and Citigroup are believed to be involved in the deal with RIL as investment bankers.

According to earlier reports the lenders may get into a pre-offer arrangement, under which RIL will pick up some of the forfeited rights and directly pay the lenders for the stake, entailing a minimum payment of $3.35 billion or Rs 15,000 crore.

The primary products of LyondellBasell are polymers (polyethylene, polypropylene), chemicals (styrene, ethylene) and fuel (two oil refineries — one in Houston, one in France). The Houston refinery processes heavy crude (mostly from Venezuela) and has a capacity of 13.5 million tons/year. The other refinery in France, which was purchased from Shell in 2008, has a capacity of 5 million tonnes.

The US arm of the company had filed for bankruptcy protection on January 6, 2009.On September 15, LyondellBasell announced it will shut its 185,000 tonne a year low density polyethylene plant (LDPE) in the UK.

Source: http://economictimes.indiatimes.com

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Oil Discovery by RIL in Cambay Basin

Reliance Industries Limited (RIL) is pleased to announce the first oil discovery in the onland exploratory block CB–ONN–2003/1 (CB 10 A&B) awarded under the NELP-V round of exploration bidding. RIL holds 100% participating interest (PI) inthis block which is located at a distance of about 130 kms from Ahmedabad in Gujarat in the Cambay basin. The block covers an area of 635 sq km in two parts viz., Part A located in the west with an area of 570 square kilometers & Part B located to the east with an area of 65 square kilometers.

3D Seismic data has been acquired over 80% of the block area and 2D Seismic data has beenacquired over the entire area. Five wells have been drilled in this block. The fifth well,CB10A-A1, which is the discovery well was drilled to a total depth of 1451 m in Part A of the block with the objective of exploring the play fairway in the Miocene Basal Sand (MBS) of Babaguru formation. A gross reservoir thickness of about 15 m was encountered and the well flowed at a rate of 500 barrels of oil per day (bopd) through a 6 mm bean with a flowing tubing head pressure of 360 psi on conventional testing. This Discovery is expected to open future potential within the block.

The Discovery, named ‘Dhirubhai–43’ has been notified to Government of India and
Directorate General of Hydrocarbons. Commerciality of this Discovery is being ascertained through more data gathering and analysis.

This Discovery supplements RIL’s understanding of the petroleum system in this block in the Cambay basin. Based on interpretation of the acquired 3D seismic data in the Contract Area, several prospects have been identified at different stratigraphic levels to fulfill Minimum Work Obligation under the PSC.

About Reliance Industries Ltd.

Reliance Industries Limited (RIL) is India’s largest private sector company on all major
financial parameters with a turnover of Rs. 1,46,328 crore (US$ 28.85 billion), cash profit of Rs 22,365 crore (US$ 4.41 billion), net profit (excluding exceptional income) of Rs. 15,637 crore (US$ 3.08 billion) and net worth of Rs 126,373 crore (US$ 24.92 billion) as of March31, 2009.

RIL is the first private sector company from India to feature in the Fortune Global 500 list of'World's Largest Corporations' and ranks 117th amongst the world's Top 200 companies in terms of profits. RIL ranks 75th in the Financial Times FT Global 500 list of the world's largest companies. RIL is rated as the 15th ‘Most Innovative Company' in the World in a survey conducted by the US financial publication-Business Week in collaboration with the Boston Consulting Group.

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Gas pricing: Next big mess

Equity considerations are leading the Government towards a gas pricing regime which will only worsen the problems of the sector. What is needed is more competition, not artificially fixed prices

Until recently, the pricing of natural gas was of interest only to those in the business. Now, thanks to the Ambani wrestling match, it has become a topic of dinner table conversation along with cricket and Big Boss.
Few discussions are more confusing — or more confused. And the reason for that is the number of ways in which gas is priced in India. At present, there are several gas pricing regimes. One gives a price of $2 per million British thermal unit (mB tu) while yet another gives to $7 per mBtu.

The various price regimes prevailing today are as follows: gas sold at an administered price (APM gas); under production sharing contracts (PSC), such as those from joint venture fields like Panna-Mukta-Tapti; and under the New Exploration Licensing Policy (NELP) like the Reliance Industries operated D6 block.

Apart from these there is a price for imported re-gassified liquefied natural gas (RLNG), and a spot LNG price that varies from time to time. The administered price for the gas produced from Government-nominated fields has been set at about $2/mBtu, except in the North-East, where it is $1 to $1.2/mBtu. APM gas applies to gas fields that the Government has assigned to ONGC and Oil India Ltd on nomination basis prior to the NELP regime.

Then there is gas price levied by producers who have got fields under production sharing contracts ranging from $3.5 to $5.73/mBtu. The price of gas from imported R-LNG in respect of term contracts is over $5/mBtu. Completely befuddled? There’s more because sometimes the weighted average of these prices is used, as once co-mingled in a pipeline, the sellers or buyers cannot make commercial distinction. Sometimes a notional price is used, calculated via quantities as in the case of the Hazira-Vijaipur-Jagdishpur (HVJ) pipeline — the customers get an allocated quantity of gas at a controlled price, and pay re-gassified LNG price for the balance.

To bring some sanity into the crazy system, the Government is inching towards another idea: a uniform gas price regime. All consumers, private and corporate, will get gas at a price fixed by the Government or any agency so appointed, as is done in the case of petrol and diesel.

Alternatively, all producers will be told to sell gas to a central marketer at a uniform price. As the energy base of the economy switches over to gas, the political benefits of this are evident. As against a government-determined price, there is the alternative of a market-determined price.

Most countries follow this system. But open mark
et pricing works best when there are many producers. Else, the danger of collusive pricing and profiteering exists.

Also, the proponents of government-determined prices say that in an era of shortage, open market pricing is not a solution. But recall: this is what they used to say about the telecom sector also.

It is clear that the Petroleum Ministry has taken its cue from the power sector — which as everyone with an inverter knows is a shining example of success. There the end-consumers get power at the same price because the SEBs purchase power from different sources and then sells at a uniform price.

Can there be a pool price as in R-LNG? This is a weighted average of expensive and non-expensive R-LNG prices. It is used for LNG to make it affordable for the consumer.
Besides, pooled prices can only be worked out for long-term contracts and currently all the domestically produced gas is sold on long-term contracts.

Nodal agency

A uniform price regime would also mean setting up a nodal agency which would monitor the pool price, and also work as an accountant taking care of the differential between the producer price and the pooled price. For example, if the price of APM gas is $2 per mBtu and the pooled price is $4 per mBtu, where will the difference go?

There are other questions as well. Will the producer get it directly or will there be a body which would keep account of this money? What will be the right price — at any given point of time it would be difficult to keep all the stakeholders happy? If one assumes that producers should subsidise for consumers then what should be the uniform as well as affordable price for sectors such as power, fertiliser, steel, city gas distribution, petrochemicals and ceramics?

It is clear from the above that a uniform price regime alone, though politically attractive, is not a solution. Altogether the best policy would be to adopt the telecom model rather than the power model, namely, increase competition and leave the rest to the market to work out.
Source: Hindu Business line

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