Vishal Chhabria & Satish John
MUMBAI: Reliance Industries (RIL) is known for its ability to successfully plan and execute huge projects in its core business area of refining and petrochemicals with supreme efficiency.
And it’s hardly a secret that RIL has once again drawn up huge investment plans to backward integrate into oil & gas exploration and production, which, as per the company’s own estimates, would cost $5.2 billion.
That apart, RIL’s foray into retail is also estimated to cost a few billion (rough estimates put the figure at $2-3 billion).
Besides, its plan to set up SEZs, too, is estimated to cost a similar amount. Analysts haven’t put a figure in this case, as details of the venture are awaited.
While executing projects super-efficiently is one part, what about funding all this?
Recently, the RIL board gave a carte blanche to its treasury department to raise $2 billion overseas through a combination of equity and syndicated loans, bonds and FCCBs.
But that’s just $2 billion. What about the rest?
Marketmen say raising that should be a breeze. Says Amitabh Chakraborty, business head, privileged client group, Brics Securities: “It should not be a problem for Reliance. Every time they required funds, we have seen that they have managed to get it with a good mix of equity and debt.”
The multibillion-dollar question for the company-trackers is whether a convertible bond issue will mean a dilution of equity or whether RIL will again soak money through the debt route.
If RIL chooses the equity route, it could be either fresh (least likely option) or part dilution of treasury shares (12.2% stake in RIL) held by the trusts — the current market value of which is Rs 21,446.50 crore.
A Reliance spokesperson told DNA Money the company does not have plans to monetise the treasury stock.
Marketmen rule out both the options, at least in the near term.
Says Amitabh: “Right now we have no expectations on equity dilution, but we have seen that companies have diluted equity at appropriate times.”
One reason here could be the reasonably sufficient scope to leverage the company’s balance sheet. RIL’s debt to equity ratio stood at 0.46:1 as on March 31, 2006.
The company’s consolidated shareholders’ funds stood at Rs 51,028 crore and total debt at Rs 23,342.80 crore as on the same date.
“The company can comfortably go up to a gearing of 1 (or 1:1 debt-equity), besides the net debt: equity ratio would be lower adjusting for the cash and investments on the company’s books,” said an analyst with a foreign brokerage who tracks the company.
Add to this the company’s annual cash flows (see table), which, after meeting dividend and regular capital expenditure requirements, would add to more than Rs 27,000 crore over the next three years.
Plus cash flow from the oil & gas operations would start in 2008 latter half, while Reliance Petroleum’s new refinery will start in 2009-10. Big cash will flow in then.
And given that no major capital expenditure is planned in the core business, most of it can be used for investing in the new segments.
In this light, even if the total investment into new businesses and backward integration works out to $8-10 billion, raising resources, for the time being, is unlikely to be an issue for Reliance - until the petrochemicals cycle moves the other way anytime soon.
