Ambani's Big Gamble

Reliance Industries treads through one of the largest investment cycles in its history, expanding the petrochemical facility and creating a 4G business.
 Nevin John        Print Edition: November 8, 2015
Mukesh Ambani, Chairman of Reliance Industries (RIL)
Mukesh Ambani, Chairman of Reliance Industries (RIL)

Reliance Industries: RANK 2

Billionaire Mukesh Ambani, Chairman of Reliance Industries (RIL), is on a spending spree. In the last financial year, RIL had invested over Rs 1,00,000 crore, about 0.8 per cent of India's GDP, in building a digital platform and expanding the petrochemical business. He plans to spend another Rs 1,00,000 crore this financial year - a large chunk of this on the launch of Reliance Jio, the 4G business, in December.


RIL
  • RANK 2015: 2
  • RANK 2014: 3
  • MARKET CAP FY15 APRIL-SEPT: Rs 2,97,742 crore
  • TOTAL INCOME: Rs 3,49,535 crore
  • NET PROFIT: Rs 22,401 crore
  • ROCE: 7.5%
  • SO WHAT: Back at No. 2 (from No. 3) but market cap down 8.9%
Source: CMIE Prowess, Standalone data

The heavy capital expenditure has taken a toll on RIL's market value. It slipped 8.9 per cent in this year's BT 500. Still, the company improved its rank by one notch and came second after software behemoth TCS.

The last one year had its fair share of challenges for RIL. Its revenues dipped 14.8 per cent to Rs 3,49,535 crore in 2014/15 because of the sharp fall in crude oil prices during the second half of the year.

Crude oil averaged $85.4 a barrel in the financial year, sliding 21 per cent. The company's exports, too, were lower by 17.1 per cent at Rs 228,651 crore. But sustained weakness in international crude prices has limited effect on earnings from RIL's core business segments - refining and petrochemical. The company can pass on the cost variation as a refinery and petrochemical producer. Indeed, strong operating performance of these two segments helped RIL improve its bottom line by 1.9 per cent to Rs 22,401 crore.

RIL's performance in the first quarter of 2015/16 was a mirror image of the last financial year. A robust performance from refining and petrochemicals businesses ensured that profit was higher by 4.4 per cent at Rs 6,222 crore.

RIL's twin refineries at Jamnagar maintained a high operating rate of 110 per cent, processing 67.9 million tonnes (MT) of crude during the last financial year, compared to average refinery utilisation rates of 86.9 per cent in North America, 80.7 per cent in Europe and 83.5 per cent in Asia. In the first quarter of FY16, the refineries processed 16.6 MT of crude with an average utilisation of 107 per cent.

The expected commencement of ongoing projects (petcoke gasifiers and off-gas crackers) in its refinery and petrochemical businesses will boost the company's core earnings substantially from the next financial year. Indeed, the core segments are expected to remain strong cash generators for RIL. The coke gasification facility at Jamnagar, which is one of the largest initiatives in the world, is expected to be ready for commissioning in phases starting from early 2016.

According to Ambani, Reliance has always believed in India and in businesses of the future. "The global economy in 2014/15 saw a steep decline in oil prices, which had a significant impact on energy businesses. This coupled with slowing growth in some of the leading global economies impacted currencies. But, there was positive news in terms of faster-than-anticipated economic growth recovery in the US, which provided momentum for the global economic recovery," said Ambani in the annual report.

RIL has invested Rs 70,000 crore in Jio, its 4G business

Meanwhile, the government's move to deregulate diesel prices last year helped RIL re-enter the domestic retail market. It plans to re-commission its entire network of petroleum retail outlets by the end of FY16. Nearly 400 outlets are operational now. It will open 1,000 more outlets next year.

But for RIL, major trouble is brewing at KG D6. The block has produced nearly 2.5 TCF of natural gas and about 27 million barrels of crude oil, substituting over $34 billion of energy imports. But RIL, along with partner BP, is struggling to maintain production because of tough geological conditions. Further exploration and production is capital intensive and technically challenging. "RIL's interest in E&P might reduce because of the escalating issues at KG D6," says Ambareesh Baliga, an independent market expert.

The 4G Foray

RIL has big plans for telecom. The company is building a wireless network that will be covering one lakh villages in the country and 80 per cent of the population. Jio has also deployed a network of nearly 250,000 route kilometres of fibre optics. Over the next three years, it plans to double this footprint by deploying fibre optics for the last mile.

S.P. Tulsian, an independent analyst, says that the recovery of the heavy investments in Jio - around Rs 70,000 crore now - will be tough for RIL in the highly competitive Indian telecom market. "However, the company has managed to arrange cheapest loans because of its high credit ratings," he adds.

However, Baliga believes that Jio will be a game changer. "RIL is not bothered about the bottom line of Jio. The other players can't afford doing it. In two to three years Jio will turn around."

RIL's only business delivering positive top line is Retail. Reliance Retail operates 2,747 stores across 210 cities in India. Despite a tough consumer environment, the retail business achieved a compounded annual revenue growth of 31 per cent over the last five years. The company plans to scale up its retail presence across formats from 200 cities to over 900 cities by next year. With the launch of Jio, Reliance Retail will come out with an e-commerce platform.

Clearly, Ambani is going all out to scale up his various businesses. The next one year is crucial for RIL and could well determine the fate of the company's numerous initiatives.

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