RIL: Time to go for the kill

Company could announce a big acquisition, as slowdown in the global petrochemicals cycle may throw up some attractive targets.

When the going is good, markets tend to be very accommodating. But when the tide turns, even the most innocuous of things can become an overhang on a company’s stock. That seems to be the case with Reliance Industries. As gas production at its KG-D6 fields has fallen by a further 10 per cent in the April-June quarter, investors are putting the company under a microscope and flagging concerns. One of the primary concerns of the markets, apart from gas production, is the stash of cash RIL will sit on after the conclusion of its deal with BP. RIL will be sitting on a war chest of $16 billion, which is nearly a quarter of its total market cap ($58 billion). Given the quantum of cash, its deployment is a matter of big concern. The company’s diversifications into unrelated areas have left the markets cold.

Even though the total investments the company has made in hotels, telecom and financial services cumulatively stands at $2 billion, only three per cent of the company’s enterprise value, investors are not very happy about it. Enam believes the biggest worry for RIL’s shareholders has been capital allocation by the management, which has resulted in the company’s stock correcting 22 per cent and underperforming the Sensex by 21 per cent in the last two years. Analysts believe the company has ventured into unrelated areas and sacrificed opportunities in the petrochemical space. While many would call RIL’s conservative approach sensible, the present valuations of Lyondell-Bassell and Dow Chemicals disprove this theory. Since the talks failed, Lyondell-Bassell’s enterprise value went up 30 per cent and that of Dow Chemicals was up nearly 16 per cent. Over the next three years, RIL’s capex plans would be in the region of $15 billion, implying cash levels of $22 billion by 2015. This would make it imperative for the company to give some indication to investors on utilisation of this cash. Most analysts rule out buyback or dividend payout. The market believes the time’s right for the company to make a big ticket acquisition, as conservatism has cost it some good buys.

On the business side, analysts claim the RIL management has highlighted the superior logistics infrastructure at Jamnagar, which is leading to lower operational expenditure compared to global refiners. Consequently, RIL is likely to maintain its GRM premium in times to come. However, with huge refining capacities coming up in Asia and Middle East, Elara Capital believes the refining environment is likely to stay stagnant over the medium term. This makes it critical for the company to invest in growth opportunities.

Given that the company has refining capacity of 1.2 million barrels per day in India, it does not need to acquire some of the refining assets currently available in the market. Oil exploration and production assets are expensive at the moment, due to high crude prices. Analysts believe the company is planning on consolidating its petrochemical business, with the intention of emerging as the world’s largest integrated petchem player. The company has lined up $10 billion in capex, too. What the company probably needs at this point of time, is access to technology and a good acquisition could give the company this, believe analysts.