Friday, March 2, 2007

CLSA report on Reliance Industries

CLSA has recommended an outperformer rating on Reliance Industries.

Pref issue to promoters

Reliance has announced a USD 3 billion 2mtpa cracker and petrochemical project in the Jamnagar SEZ to recover olefins from FCCU and coker off-gases of the two refineries there. The project will increase ethylene cracker capacity in the group to over 3mtpa – one of the largest in the world. Reliance also announced a preferential issue of 120m warrants to promoters that will infuse USD 3.8 billion in the company if exercised and also raise promoter stake to 55%. While this does signal a strong vote of confidence, it will also preclude further creeping acquisition in the secondary market where promoters have bought USD 1.2 billion over the last year. Reliance will build a USD 3 billion cracker complex.

Continuing on its path to create mega-capacities across its business streams, Reliance has announced a USD 3 billion petrochemical project at Jamnagar SEZ that will house a 2mtpa cracker (ethylene + propylene) and associated downstream units. The project will come onstream in 2010- 11 and increase ethylene cracker capacity in the group to 3mtpa – one of the largest in the world. The downstream unit configuration is still being finalised but will include both commodity and speciality chemical derivatives. Capex on this project is likely to accelerate only after the Reliance Petroleum refinery comes onstream in 2008.

Continuing chain integration in hydrocarbons.

The cracker will recover ethylene and propylene from the off-gases of the FCCU and coker of the existing Reliance refinery at Jamnagar (660kbpd) and also the upcoming RPL refinery (580kbpd) – another example of chain integration in hydrocarbons. Refinery off-gases are currently being used as fuel and will be substituted with natural gas from KG-D6. By using offgases, Reliance hopes to be it in the first quartile of on ethylene cash costs globally and be as cost competitive as Middle-East facilities which have access to cheap feedstock. Technology suppliers estimate payback times as low as 18-30 months.

Preferential issue of 120m convertible warrants to promoters.

Reliance has also announced a preferential issue of 120m warrants to the promoters that will allow them to subscribe to 120m shares anytime over the next 18 months at a price we estimate to be not lower than Rs 1397 per share. This will raise outstanding shares by 8.6% to 1,513m and dilute existing minority shareholders by 8%. Reliance has also decided to go in for a USD 2 billion ECB to finance its immediate E&P plans (USD 5-6 billion in the next 2 years).

Promoter will rise to 55%.

The Reliance Group may spend an unprecedented USD 50 billion over the next 5-8 years and this equity infusion will strengthen the balance sheet. At the SEBI (regulator) determined price (Rs1397), the issue will infuse USD 3.8 billion in Reliance on warrant-conversion and signals a further vote of confidence by management in its medium term prospects. Promoters had already spent USD 1.2 billion in open market purchases in the last year to increase their stake by 3.2% to 50.6%. The warrants, once converted, will increase this to 55% (including treasury stock) and will preclude any further purchases, though, as regulations bar creeping acquisition beyond this limit without a 20% open offer unless the promoter holding comes down on the back of a placement of the treasury stock, external equity funding or group mergers.

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