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Reliance Petroleum: Long distance call

New refinery will give an impetus to Reliance Petroleum's exports

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Niraj Bhatt Mumbai
Last Updated : Jun 28 2013 | 6:09 PM IST
Reliance Petroleum's planned 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.
 
Over the past several quarters, RPL's parent Reliance Industries has clearly demonstrated its ability to earn gross refining margins (GRMs) in its existing refinery, which are well above the benchmark Singapore refining margins.
 
Hence, as part of the export-oriented focus for RPL, it is no surprise that the planned refinery would also be configured to meet stringent requirements of key markets in the West, coupled with its ability to process large quantities of 'sour' type crude to ensure buoyant GRMs.
 
Analysts stress the importance of the US market for RPL, given the current shortage and stringent environmental requirements for setting up new refineries.
 
For instance, according to the US Energy Information Administration, American refineries are estimated to have a capacity to process around 17 million barrels of oil per day, while the US consumption is hovering at 20.6 million barrels per day.
 
This gap is expected to widen further, say analysts, given the current growth in consumption of petroleum products.
 
RPL's forthcoming IPO of 135 crore shares is in the price band of Rs 57-62 per share. Just a few days ago, 45 crore shares were pre-placed with institutional investors at a price of Rs 60 per share. RIL will also buy 90 crore shares at the issue price of the IPO. RIL had invested Rs 2,700 crore at par before the issue.
 
Assuming an issue price of Rs 60, the same price that large investors paid, RIL will invest an additional Rs 5,400 crore. Thus, RIL will have invested a total of Rs 8,100 crore in a company that is estimated to have a market cap of Rs 27,000 crore (if the price is at Rs 60 after listing), and will have an 80 per cent stake in the company.
 
Analysts are estimating an upside of over Rs 110 per share for the RIL share shareholder if the listing is above Rs 62.
 
RPL's total project cost is pegged at Rs 27,000 crore, which is being met by a combination of debt and equity. RPL has been in existence only for a few months, hence, it is not possible to employ traditional valuation techniques or compare it valuations with other refineries.
 
The Reliance companies have demonstrated their ability to implement large projects in a relatively short span of time, and in all likelihood, that will be repeated with RPL too.
 
Since the refinery is expected to be commissioned in December 2008, there will not be any immediate triggers for the stock, but long term investors can take a closer look.
 
FMCG Stocks: On a roll
 
Much like the broader market, the FMCG index too seems to be unstoppable. In calendar 2006, the index has moved 41.36 per cent compared with 25 per cent for the BSE Sensex. Among the BSE sectoral indices, it has been the second biggest gainer after the BSE Capital Goods index.
 
And at 2328.8 on Wednesday, it made another new high. The rise in the prices of FMCG stocks reflects the optimism on the sector, which is showing clear signs of revival " retail sales of FMCG goods in February hit a five-year high at 10.6 per cent, according to the market research agency AC Nielsen.
 
Also, the recovery is fairly broad-based with most categories growing or at least not seeing a fall in sales.
 
Five of the top ten categories tracked by the agency saw a double-digit growth. Demand from rural areas appears to be driving a good part of the sales and analysts believe that this would continue given the good monsoons last year.
 
With consumer down-trading almost reaching an end, and consumer up-trading seen in some segments, manufacturers have begun to pass on higher raw material costs, which they had been absorbing in the past, much to the detriment of their margins. Thus, companies have got back some amount of pricing power and margins should bounce back.
 
The marketing initiatives of the past few years"lower price points and more variety" should pay off now that the sector should see a higher share of the consumer's wallet share.
 
Once VAT is fully implemented, the organised sector would be even better off. With such a strong run-up in share prices, valuations are not cheap"-17-40 times estimated FY07 or CY06 earnings.
 
But buoyant consumer demand and consequently fairly good visibility of growth prospects together with the absence of paper supply, should keep them that way.
 
With contributions from Amriteshwar Mathur and Shobhana Subramanian

 

     

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First Published: Apr 07 2006 | 12:00 AM IST

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