Editorial: RIL bets big

Jun 20 2014, 00:05 IST
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SummaryGas price hike could keep the momentum going

Reliance Industries Limited’s (RIL) R1.8 lakh crore investment plans—to be executed over just three years—is in keeping with its long-term strategy of both building on its existing businesses and expanding into new areas. The firm has always been willing to commit serious capital to both existing and new spaces and, at its annual general meeting last year, it had announced it would be investing R1.5 lakh crore. Given its large cash flows, it is not surprising the firm ventured out into new areas. The telecom piece has been in the making for a few years now and RIL is looking at a big bang pan-India rollout of the 4G network next year. The telecom services business has been viewed by analysts with some degree of anxiety; they believe it may not succeed in generating a good enough return, of, say, 10%, on the projected investment of $14 billion, which pencils in a $4 billion ebitda loss to pick up market share. Kotak Institutional Equities, for instance, feels the firm will need to garner a market share of 30-40% in both the voice and data spaces before the returns can be decent.

Meanwhile, the other consumer-focused business, RIL’s retail venture, is clearly gaining scale. However, given the small margins, the turnover will need to treble from the current level of R14,496 crore for the profits to contribute meaningfully to the company’s consolidated bottom line. Till then, the core petrochemicals and refining businesses will drive earnings; indeed, the bulk of RIL’s investments have been earmarked for its petrochemicals expansion. RIL’s refining segment continues to do well as reflected in the strong gross refining margin of $9.3 per barrel reported in Q4FY14. The Street has been concerned about how soon gas production from the company’s KGD6 basin will be ramped up and how soon the government will raise gas prices. Together with a steady rise in output, a price of $8 per mmbtu or thereabouts would make a big difference to the company’s bottom line leaving it with larger cash flows for new ventures.

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