On Tuesday, a day after reports said Reliance Industries sweetened its bid for the troubled Dutch petrochemicals major LyondellBasell to $14.5 bn from up to $12 bn earlier, RIL shares fell on the BSE. The reason for this, according to analysts, is concerns among investors of higher cash outgo on the part of RIL for acquisitions. While the country?s largest private sector firm had cash and cash equivalents of Rs 15,960 crore as of December 31, 2009, and raised about Rs 9,240 crore by selling treasury stocks in three tranches since last September, the concern is if it will get drawn into a bidding war, and eventually over-pay for assets abroad.
No one is questioning the strategic merits of the Lyondell acquisition for RIL. It is also incorrect to believe the company?s penchant for acquisitions will get moderated if it is unsuccessful in the Lyondell bid. According to reports, the company has already submitted an expression of interest for the oil sands assets of Canadian company Value Creation. Also, it has no major projects lined up to consume the excess cash the company will generate ($25 billion, according to a Goldman Sachs estimate) in the period up to FY2014. So, it?s easier to believe that RIL?s appetite for acquisitions will continue unabated.
Yet another area of concern is a tempering down of expectations on the part of analysts on the volumes and profitability of KG-D6 oil and gas and a lowering of net profit estimates for RIL. Investors would surely not like a company to over-pay for assets when its cash flow from its core business could be potentially affected by a downturn in business. An RBS report said it has reduced its assumptions of gas volumes from RIL?s KG-D6 block over FY10-11 by 10%, and oil volume assumptions by as much as 30-50%. It says that although Singapore complex gross refining margins have strengthened in the fourth quarter of FY10 to date (to $5 a barrel, from $1.92 in the third quarter), the current uptick is unsustainable, given the low levels of global capacity utilisation. It adds that although petrochemical margins have also been stronger than analysts had anticipated, it expects them to weaken post the first quarter of FY11, as new capacity comes online. Investors, therefore, would be keen to see how far RIL would be willing to stretch in its bid for Lyondell, or, for that matter, any other potential assets in the future.
mg.arun@expressindia.com