RIL: Aggressive Steps Needed

ALTHOUGH the market did not react negatively to the unsuccessful attempt by Reliance Industries (RIL) to acquire petrochemicals major Lyondell-Basell (some analysts cheered the development), the key challenge for the RIL would be how to drive the next phase of growth.
The company, which commissioned two mega-projects last year — the new refinery and KG basin gas — and scaled them up progressively to near full capacity, has added nearly 30% additional capital to its business annually in the past five years. Over the next five years, this rate is expected to halve. The implication is that the company could get saddled with surplus cash, if it is unable to find new avenues to invest its growing cashflows. RIL, which raised over Rs 9,300 crore from sale of treasury stock and has another Rs 18,000 crore worth of treasury stock, was generating over Rs 15,000-crore cash from operations annually for the past five years. These cashflows are only set to go up further considering its new refinery and the KG basin gas production.
According to Goldman Sachs, RIL is set to generate around $25 billion of excess cash over and above its committed capex in four years, from FY11 to FY14. If not reinvested, these cashflows could make RIL debtfree by FY13 — that is within the next three years. Thus, the company is entering a new phase, where it has lots of resources to invest, but no significant avenue to deploy them. In this sense, securing the LB deal was important for the company.
The rate of growth in RIL’s annual capital expenditure has been phenomenal in the past few years. The company, which spent just Rs 2,100 crore in FY06, incurred a capex of Rs 24,700 crore in FY09. In the first nine months of FY10, it has spent over Rs 7,800 crore on capex, excluding capitalised interest and forex fluctuations. During the next couple of years, the main item on RIL’s capex plans will be the upgradation of the KG basin producing assets to a plateau level of 120 MMSCMD from existing 80 MMSCMD. This is estimated to take up around Rs 17,000 crore of incremental investments.
Besides, the company will continue to incur around Rs 3,000-3,500 crore annually on upgradation of petrochemicals and refinery projects. Still, the incremental capex is likely to fall short of its operating cash flows.
In this scenario, going for an acquisition makes a lot of sense for RIL. Even before the outcome of LB bid was confirmed, the company had reportedly made an acquisition bid for a Canadian company. However, there again, it’s pitched against stiff competition from other global energy majors and the outcome remains far from clear. While RIL’s cautious approach to the LB deal was free of the overpaying risk, the company will have to take aggressive steps to ensure its long-term growth trajectory.