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Reliance Industries may spread its wings

According to analysts, the cash from BP deal will enable India's biggest company to easily diversify into several emerging businesses and scale them up quickly.

Mail Today Bureau | February 24, 2011 | Updated 13:39 IST

With Rs 63,000 crore cash in hand, Mukesh Ambani can buy anything on earth - and even look for the skies.

The recently signed deal with British Petroleum (BP) has given Reliance Industries Ltd (RIL) humongous financial muscle power. According to analysts this would enable India's biggest company to easily diversify into several emerging businesses and scale them up quickly.

As on December 31, 2010, RIL had Rs 31,000 crore of cash reserves in its balance sheet and the BP deal would make it richer by a further $7.2 billion (Rs 32,000 crore) shortly.

Putting together, RIL will have a war chest of a minimum Rs 63,000 crore without factoring in the cash profits to be generated from the December-March quarter.

According to some group officials, the BP deal awaits government's approval and the money should come in by the April-June quarter of 2011-12.

Analysts feel that much of the cash reserves would go into the existing exploration business and capacity expansion of the petrochemicals arm.

The RIL spokesperson declined to comment as to what the firm would do with so much money.

"RIL has decided to go big in shale gas in the US and aggressively buy blocks. Most of the funds may go there. Apart from this, RIL has identified 4G (fourth generation) telecom as a growth area and could pump in funds for this business," said a research head of a foreign brokerage who asked not to be named.

Mukesh Ambani has already outlined plans to foray into power, broadband, education and hospitality businesses, and the market has been agog with speculation since many months that he may buy out Reliance Communications (RCom) from younger brother Anil Ambani. This could not be independently verified, though.

The BP deal and recent statements by Mukesh Ambani indicate that RIL is adopting an asset light strategy. And if this is true, the RCom deal may not happen. But nothing can be ruled out if a good asset is available cheap, analysts felt.

Interestingly, RCom is the brain child of Mukesh Ambani and he was closely involved with it before it was transferred to Anil Ambani as part of the division of the Reliance empire.

The oil exploration business is highly lucrative but risky. RIL has so far invested over $7 billion in the KG-D6 exploration blocks in the east coast. The 23 new blocks, where BP has acquired 30 per cent stake, would involve additional investment of over $100 billion considering each block requires $5 billion investment in the next eight years.

RIL has of 29 blocks out of which 23 will come under joint development by RIL and BP. According to the new exploration policy, private players do not make any upfront payment to bag an exploration contract but enter into a profit sharing pact with the government.

The private company makes all the investment and takes the risk. But it will plough back the costs incurred from the initial revenues once oil or gas is found and commercialised. Fortunately for RIL, gas has turned into gold and Mukesh Ambani is now reaping rich dividends. The BP deal is testimony to this fact.

Courtesy: Mail Today

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