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Cover Story

When The Tallest of Peaks Aren’t tall Enough
Reliance Industries ltd. Catapults itself to The Number 1 Position backed by Robust Refining & Petrochemical Profits. But it can Certainly do even better than that
Issue Date - 21/07/2011
In terms of absolute revenues, Wal-Mart with revenue of $421.85 billion (profit of $16.39 billion) and Exxon Mobil with revenues of $354.67 billion (profit of $30.46 billion) in the year 2010 are at the pinnacle of the Fortune 500 list in America, and have dominated the corporate world for many years now. So as Reliance Industries relentlessly strives to extend its leadership position in petrochemical refining to E&P and further to retail and therefore become ‘Exxon Mobil plus Wal-Mart’ in the Indian context, it’s headed to unprecedented & insurmountable glory. And this is discounting sectors like financial services (with the takeover of Bharti’s stake in AXA) and telecom where RIL is keenly eyeing a larger play.

With a net profit of Rs.202.86 billion (growth of 25% yoy) for FY 2010-11, RIL is at the top of this year’s B&E Power 100 list and taken the spot from ONGC. Turnover of the company has increased by 29% to Rs.2.58 trillion. Chairman Mukesh Ambani quoted on the results, “Global economic growth, emerging markets demand and tightness in the markets led to recovery in refining margins and record petrochemical earnings.” A far as the segment-wise results are concerned, the petrochemicals business reported a profit after tax of Rs.95.4 billion (growth of 10.4% yoy), refining profits were Rs.91.56 billion (growth of 51% yoy) and oil & gas reported profits of Rs.57.99 billion (growth of 11% yoy).However, the textile, retail, SEZs and telecom businesses, clubbed as ‘others’ suffered a loss of Rs.4.13 billion. Reliance Retail alone showed a loss of Rs.3.51 billion for the fiscal over a profit of Rs.182.2 million in the previous year. In recent news articles, Reliance claimed that it already is the largest food retailer in India, even though it was later rebutted by Future Group CEO Kishore Biyani, who said that Reliance Retail could be largest in terms of number of stores but not revenue.

The company has done most of its investments in E&P and refining are complete and 50% of new investments have gone into shale gas forays and the broadband auction. A major highlight was the alliance with BP, wherein RIL sold 30% stake in its 23 oil and gas production sharing contracts in India, including KG-D6 block for around $7.2 billion and a 50:50 JV for sourcing and marketing of gas. Besides the financial upside, it would provide RIL with world class expertise to improve its recoveries. Moreover, the company entered into three shale gas production JVs in the US with Atlas Energy, Pioneer Natural Resources and Carrizo Oil & Gas. It also finally reentered telecom with a 95% stake in Infotel.

It is quite evident now to the company officials themselves that retail will not be as easy as they perceived earlier. For starters, RIL’s core business has always been B2B and B2C is a markedly different arena to dominate. They are already operating 19 formats, with little information on individual profitability and future perspective. The company has had to rein in its expansion plans by shutting down unprofitable stores. Moreover, competition is stiff from the likes of Future Group & Aditya Birla Group, et al. Wal-Mart has made a slower but surer start with its wholesale model and more MNC giants are coming in.

This is in marked contrast to the petrochemicals and oil & gas, where the company operates in monopoly or oligopolistic markets. Even here, it is worthwhile to mention that RIL’s profitability can be far better when it comes to global benchmarks. When you consider the net profits to sales ratio RIL stands at 7.86% (FY 2010-11), which is significantly behind Exxon-Mobil at 8.58% and Chevron at 9.69% (FY 2010) despite the latter two being much larger. So even when it comes to RIL, there is a scope for improvement in its profitability. Moreover, it has to attend immediately to the underrecoveries in the K-G Basin that are affecting its E&P prospects, leading to gas buyout in the open market from Petronet LNG and Shell for maintenance of their captive index. A report by analyst firm Motilal Oswal reveals that the company’s “proven reserves declined by ~12% due to production, re-classification resulting in deletion of some reserves, and no new reserve accretion.” At this juncture, the CAG report that accuses the ministry of giving an unfair permission to RIL on increasing its capex in the K-G basin has further depressed valuations leading to a downgrade from neutral to overweight by HSBC. While the year gone by gives RIL plenty of reasons to celebrate, it is equally important to introspect on stumbling blocks in the coming months and develop clarity on the best course of action, even if it means giving retail a more circumspect treatment.


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