Reliance Industries Ltd., owner of the world’s largest oil-refining complex, plans to invest 1 trillion rupees ($18 billion) in India in the next five years to double operating profit.
The company will invest across all its businesses and in new divisions including retail and digital services, Chairman Mukesh Ambani said today at a shareholder meeting in Mumbai, where the company is based. The aim is to increase revenue from the retail business as much as six times in three to four years and more than double natural gas output to 60 million cubic meters a day, he said.
Billionaire Ambani is adding retail stores and expanding his petrochemical business to revive operating profit, which fell in the year ended March 31 for the first time since at least 2003. The spending will be the most since the company lost more than half of its market value after reaching a record in January 2008, the year it completed its second oil refinery.
“The aspiration to double operating profit alone will have little bearing on the company’s valuations, until there is a considerable change in fundamentals of the business,” said Sudeep Anand, an analyst at IDBI Capital Market Services in Mumbai. “The environment for the company’s core business continues to remain tough and it’s not a surprise that it’s looking at new businesses to drive growth.”
The shares gained as much as 2.2 percent to 731.90 rupees and traded at 723.05 rupees as of 12:14 p.m. in Mumbai. The stock has gained 4.4 percent this year, lagging behind a 7 percent advance in the benchmark Sensitive Index.
Reliance is also boosting investment in extracting gas trapped in shale rocks in the U.S., Ambani said. The shale-gas business is a major area of Reliance’s investment over the next three to five years, he said.
The company is planning an $8 billion expansion of its petrochemicals business, betting Indian demand for materials used to make plastics and polyester will help counter weak global fuel sales.
Operating profit fell 5 percent to 227.8 billion rupees in the year ended March 31 from a year earlier, the first decline since at least 2003, according to data compiled by Bloomberg. Full-year net income gained 2 percent to 197.2 billion rupees. Profit fell 21 percent to 42.4 billion rupees in the three months ended March 31, the steepest drop since 2008.
“The refining industry experienced one of its most difficult years in 2011,” Ambani said today. “The geopolitical upheavals in the Middle East, the massive earthquake in Japan and financial instability in Europe combined to create a very difficult operating environment.”
Output from Reliance’s KG-D6 block, India’s biggest natural gas field, is expected at 28 million cubic meters a day in the current fiscal year and may decline to 20 million in the year starting April 1, 2014, oil minister S. Jaipal Reddy said in parliament on May 8.
“The volatility in crude prices, subdued margin outlook for transportation fuels as well as petrochemicals and lower-than-anticipated production from the KG-D6 block resulted in profits remaining at the same level as last year,” Ambani said.
The reserves from the D1-D3 field have proved more difficult to produce than anticipated, he said, adding the company is working closely with partner BP Plc to “understand the complex geology” of the KG-D6 block. BP acquired a 30 percent stake in Reliance’s 23 oil and gas blocks, including KG-D6, for $7.2 billion in February last year.
Reliance is seeking more partnerships to grow its business, Ambani said. The 55-year-old Ambani last year took on BP 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.
The company had 702.5 billion rupees of cash and equivalents as of March 31, surpassing its 682.6 billion rupees of liabilities, according to an April 20 statement. Reliance wants to use its record cash to reverse a 24 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.