RPL rides high on pedigree, promise

Reliance Petroleum's listing price was on expected lines and analysts feel that there will be buying interest in the RPL story with every dip in its stock price.

"Prima facie, it may look a bit over-valued but if you see the pedigree and promise of the stock, there is no surprise in the premium that it commands in the market," said a stock broker.

Nimesh Kampani of JM Morgan Stanley said Chevron's association with the project as a promoter would augur in well for the company. Chevron now holds 5 per cent stake and will raise it to 29 per cent.

RPL is one of the rare stocks which has got listed without a running project. "As the refinery is expected to be commissioned in December 2008, there may not be any immediate triggers for the stock, but long term investors will certainly go for it," pointed out a broker.

The Reliance companies traditionally have demonstrated their ability to implement large projects in a relatively short span of time.

RPL plans 27 million tonne refinery in Jamnagar is targeted to meet the increasing shortage for petroleum products globally. Apart from the refinery, RPL would also be setting up a 0.9 million tonne polypropylene plant.

The addition to refining capacity in the world is expected to lag requirements or demand by a huge margin because of the environmental restrictions for such greenfield projects in Europe and the US.

Analysts said it did not make sense for RPL to set up gas retail outlets in the developed countries as this would involve huge costs. So, the best option is to refine crude locally and export them to high-end markets.

After the refinery at Jamnagar is commissioned in 2008, oil analysts expect RPL to rake in a minimum revenue of $12 billion (assuming the crude price at $60 a barrel) in its first full year of operation. This refinery, being set up next to Reliance's existing 6,60,000-barrels per day (BPD) refinery, will process 5,80,000 bpd.

The capital cost of RPL, analysts said, was expected to be 50 per cent lower than the industry average, the feedstock cost would have a $3-3.5 per bbl advantage over Singapore, and the operating cost advantage would be about $1 per bbl over Singapore.

RPL will also have a $5.5 per bbl margin advantage over Singapore Refinery, compared with around $3 per bbl advantage enjoyed by the existing Jamnagar refinery, analysts said.

The reasons why RPL will have lower feedstock costs are many. Reliance has the expertise to process heavy crude and has processed 55 different crude grades in the existing refinery. RPL is being designed to process heavier and cheaper crude.

RPL's earnings, analysts said, are expected to be more robust than that of the existing Jamnagar refinery, which was commissioned in 1999 when industry returns were much lower. The uptick in refining margins is a recent phenomenon and RPL's fast-track commissioning by December 2008 would capture the upside.