Reliance Industries: Filling its coffers

The proceeds from selling treasury stock will add to RIL’s cash and help its big acquisition plans.

The sale of a part of Reliance Industries’ (RIL) treasury stock through a block deal on the bourses inaugurated trading in 2010. RIL garnered almost Rs 2,675 crore by selling 25.85 million shares (held by a trust, owned by a RIL subsidiary) to LIC at an average price of Rs 1,035 per share or a 5 per cent discount to the previous closing price. The discount isn’t unusual, say analysts, given the size of the deal.

However, the price is lower than the sale price of Rs 2,125 (pre-bonus and pre-dividend) of the earlier deal done in mid-September 2009, when RIL had raised Rs 3,188 crore by selling treasury stock to institutional investors.

With the latest move, RIL has added to its cash kitty (of Rs 19,421 crore as on September 2009), which it could use for its estimated $12 billion bid for petrochemicals’ major Lyondell Basell and exploration projects. If required, RIL could also tap the remaining treasury stock of 333.85 million, valued at Rs 36,000 crore.

The markets, however, were not impressed. Over two days, the stock lost 1.8 per cent as against 1.3 per cent gain in the Sensex. Notably, the stock has also underperformed the markets since mid-September — down by about 2 per cent as against Sensex’s 7.5 per cent rise. The underperformance can be attributed to factors like pending gas dispute with RNRL, overhang of its bid to acquire Lyondell and uninspiring performance.

While analysts believe that RIL’s gross refining margins (GRMs) have in all probability bottomed out and should stay above the lows touched earlier, the petrochemical business may remain under pressure in the medium term till demand picks up.

The buffer for the stock is, however, on the exploration front. Last month, RIL hit a gas gusher with three reservoir zones in the D-3 block of Krishna-Godavari (KG) basin. This heralds its third consecutive find in this block, in which RIL owns 90 per cent stake and UK-based Hardy Oil 10 per cent.

While the regulators’ decision on commerciality of the block is awaited, analysts say that Hardy had earlier indicated prospective resources of 695 million barrels of oil equivalent. Based on RIL’s stake in the D3 block, analysts have pegged its value at Rs 21-30 per share.

This find emphasises eastern India’s offshore potential where RIL has 10 blocks in the KG basin and 8 in the Mahanadi basin. Currently, RIL has one rig operational in an exploration block in Oman and three rigs in India (in D6, D3 and Cauvery Basin). It is expected to add two more in 2010, which indicates that RIL’s exploration activities are likely to pick up in the current year.

The ramp-up in production from the KG-D6 block is the main focus currently; it recently achieved a flow rate of 80 million standard cubic metres. The KG-D6 block is valued at Rs 241 per share in terms of oil production and potential upsides. RIL’s other fields such as NEC-25, CBM Sohagpur and D9 are valued at Rs 226 per share, as per an India Infoline report.

At Rs 1,069.55, the stock trades at about 14 times 2010-11 estimates. Two key factors loom over the stock — the outcome of the court case judgement due in the next couple of months and the Lyondell acquisition bid. Positives on these fronts and new oil and gas discoveries will act as a trigger for the stock in the near-to-medium term.

Sources: Business Standard

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