Reliance Industries: Growth is Life

23rd Nov 2009

Ramkrishna Kashelkar ET Intelligence Group

The proposed acquisition of LyondellBasell by Reliance Industries, which has just carried out two of its multi-billion-dollar projects in the refinery and E&P space, can mark a mega-leap for the hither-to India centered behemoth. The acquisition, if goes through, can not only expand the company’s presence significantly in the global petrochemicals market, but will also give it entry into the technologically superior specialty chemicals. Similar to what Reliance is in India LyondellBasell is a refinery to polymers to chemicals major in Europe and the US, but has progressed into the advanced materials business through extensive R&D efforts.

LyondellBasell (LB), which was created at the height of the market boom in December 2007, reported operating loss of $5.9 billion for the year ended December 2008, with its networth turning negative. Although the company’s operations generated over $1 billion cash during the year, it had debts worth $22.9 billion payable within the year 2009, which forced it to take refuge under Chapter 11.

One of the most attractive points for RIL in this acquisition is LyondellBasell’s global leadership in polypropylene and its derivative products. LB represents 14% of world’s polypropylene capacity. LB’s two refineries – one in Houston, Texas and the other in France – with a combined refining capacity of 373,000 barrels per day can add nearly 30% to RIL’s existing refining capacity in India. LB is also the owner of several proprietary technologies and catalysts used in the production of downstream petrochemicals such as propylene oxide.

The exact value of the deal or the stake that RIL proposes to buy in LB are yet not known, however, the deal is likely to be an all-cash deal. In this regard, Reliance surely has a huge potential power to make such large overseas acquisition for cash.

As on 30th September 2009 RIL had cash and cash equivalents of Rs. 19,421 crore (US$ 4.0 billion). An additional $650 million were raised by its subsidiary when it sold treasury shares in September this year. This subsidiary continues to hold another 8.96 crore shares in the company valued at over $4 billion. RIL’s net debt was approximately Rs 51000 crore resulting in a net debt to equity ratio of 0.42. If the company decides to raise this debt-to-equity ratio to 1, it can borrow nearly Rs 70,000 crore more or around $14.9 billion.

Considering these factors, RIL’s acquisition of LB, if successful, will surely help the Indian major to make a global mark in the long term. Investors must, however, bear in mind that the actual acquisition could take months to fructify and the benefits may not accrue in the short-run.