Ambani Plans $12 Billion Expansion to Offset Profit Slump

Reliance Industries Ltd. Chairman Mukesh D. Ambani
Mukesh D. Ambani, chairman of Reliance Industries Ltd. Photographer: Adeel Halim/Bloomberg

Reliance Industries Ltd., owner of the largest oil-refining complex, will expand its petrochemicals businesses as it bets Indian demand for materials used to make plastics and polyester will help offset weak global fuel sales.

The company controlled by billionaire Mukesh Ambani, Asia’s second-richest man, will spend $8 billion to boost capacity and $4 billion on a plant to make a combustible gas for powering its refineries and petrochemical factories in western India, Mumbai-based Reliance said in an April 20 presentation, after posting its biggest profit decline in three years. The outlay will be its highest since completing its second refinery in 2008.

Reliance wants to use its record 702.5 billion rupees ($13.5 billion) cash to reverse a 29 percent slump in its stock in the past year after a slowdown in China’s economy and Europe’s debt crisis cut fuel demand, adding to the drag on earnings from lower production at India’s biggest natural gas field. Reliance estimates India’s economic growth will spur a 54 percent increase in chemicals in the next five years.

“The spending plan brings a lot of clarity on the use of their cash,” said Niraj Mansingka, a Mumbai-based analyst at Edelweiss Capital Ltd., who recommends buying Reliance shares. “The strategy of building capacity in chemical and refining to meet Indian demand offsets the fall in gas production.”

Shares Rise

Reliance rose 0.8 percent to 736.30 rupees at the close in in Mumbai. The stock has gained 6.3 percent this year compared with an 11 percent increase in the benchmark Sensitive Index. Of the 51 analysts covering Reliance, 29 recommend buying the stock and eight selling.

Cash held by the company surpassed its total debt of 682.6 billion rupees as of March 31.

Reliance’s net income declined 21 percent to 42.4 billion rupees in the three months ended March 31, according to an April 20 regulatory filing. The earnings missed analyst estimates for the sixth straight quarter.

Pretax profit from petrochemicals fell 17 percent to 21.7 billion rupees, while earnings from refining dropped 32 percent, the company said. The two businesses accounted for 78 percent of the company’s pretax profit in the fiscal fourth quarter.

Reliance’s crude oil refining complex at Jamnagar in Gujarat state can turn cheaper, low-grade crude into high value fuels that are sold in Europe, U.S. and Asia. Total exports rose to $41 billion in the year ended March 31, according to the April 20 presentation to analysts.

Double Capacity

The company earned $7.6 for every barrel of crude it turned into fuels in the quarter ended March 31, 17 percent lower than a year earlier.

Reliance plans to almost double capacity to produce petrochemicals including propylene, used to make plastic and packaging material, and purified terephthalic acid, used as a raw material for polyester, Religare Institutional Research said in an April 21 report.

The expansion to 18,154 kilotons a year would account for about 55 percent of India’s estimated petrochemicals demand in the year ending March 2016, according to the report. A quarter of Reliance’s sales in the year ended March 2011 were from petrochemicals, according to data compiled by Bloomberg.

Indian Oil Corp., the nation’s biggest refiner, and Haldia Petrochemicals Ltd., near Kolkata, are rival producers of chemicals including polymers and polyethylene.

Petroleum Coke

Reliance also plans to build a plant that will turn petroleum coke, an oil byproduct produced at the refinery’s coker unit, into synthesis gas, which is cheaper than imported liquefied natural gas, according to the company. Using synthesis gas, or syngas, will reduce cost of refining and add about $3 a barrel to the company’s refining margins, according to Religare.

“Investment in petroleum coke gasification will lower the cost of running its facilities,” said Sandeep Randery, an analyst with Brics Securities Ltd. in Mumbai, who advises investors to buy Reliance shares. “The petrochemical expansion will strengthen its presence and help gain some market share. Both expansions should be value accretive over time.”

Ambani, 55, last year took on BP Plc as a partner to help reverse the slump in gas output at its biggest deposit and to develop new exploration areas off India’s east coast.

Technical Difficulties

Gas production at the Reliance-operated KG-D6 deepwater block in the Bay of Bengal was 34.7 million cubic meters a day last quarter, 14 percent lower than the preceding three months, Batlivala & Karani Securities Pvt. Ltd. said in an April 21 report.

Output peaked at about 60 million cubic meters a day in June 2010 and has declined because of technical difficulties and a drop in pressure at the reservoir, according to Reliance.

The company could cut its proved reserves by as much as 15 percent because some discoveries are too small to be commercially viable, the Batlivala & Karani report said.

Reliance sold a 30 percent stake in 21 fields, including KG-D6, to BP for $7.2 billion to get access to the London-based explorer’s technology. The partners are preparing a plan to develop various discoveries within the block simultaneously instead of in phases, according to Reliance. The plan will be submitted to the government for approval in the second half of the current financial year.

The partners won government approvals in the first two months of this year to develop four satellite discoveries and one in an area called the R-Series within the KG-D6 block.

Margin Pressure

“Reliance is currently facing margin pressure in all of its main business areas,” said Taina Erajuuri, a Helsinki-based fund manager at FIM Asset Management that oversees about $1.2 billion in emerging markets. “An increase in domestic gas production could be a positive trigger for the stock.”

The company, which also operates retail stores and owns a cricket team, is diversifying into telecommunications, media, financial services and hotels. Chairman Ambani, worth $22.4 billion, lost his position as Asia’s richest man to Li Ka-Shing after the Hong Kong-based Chairman of Hutchison Whampoa Ltd.’s wealth increased 8.1 percent this year, according to data compiled by Bloomberg

“Reliance needs to do all it can now to increase its profit,” said Rina Sanghavi, a Kolkata-based analyst at SPA Securities Ltd. “Expansion in their core business, where they have expertise and historically earned money from, is definitely a good idea.”

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