Reliance Industries has announced several new large-scale projects for next 4-5 years in refining and petrochemical space, which shows the company has begun its next big capex cycle. This will put to rest the uncertainties involving the company’s plans for its growing pile of cash. Nevertheless, the projects are all long-term, and unless business environment improves, investors may not have anything exciting in the short term.
This may be one reason why the RIL stock has actually gained since its result announcement on 20th April. The company posted a 21.2% fall in net profit thanks to all-round weakness. Most of the brokerages have reduced their target prices following the poor show.
RIL will be investing over $12 billion over next 4-5 years in the refining and petrochemical industries, which may go up due to its investments in retail, E&P or telecom segments. Still this will not necessitate any significant increase in the company’s debt level, since its operating cashflows will be sufficient.
RIL will set up a $4 billion petroleum coke gasification project that will produce syngas – a combination of hydrogen and nitrogen – that will replace expensive LNG as fuel. Once implemented over next 3 years, this will add $3 per barrel to RIL’s refining margins. Similarly, it will spend $8 billion on adding capacities of PFY, PET, polyester and intermediate chemicals such as PTA and paraxylene, besides adding new products such as carbon black and rubber.
These projects are big and hold potential to boost RIL’s already huge bottomline in a marked manner when commissioned. However, they entail long gestation and won’t do much to assuage the current investor worries. “If things go as per plan, and with higher gas prices (inIndiaand in theUS), we estimate all the E&P, petrochemical projects can almost double RIL’s EBITDA by 2016-17, without much net debt increase. Given the lead time and the early stage (risk) of these projects, the market may not get excited about this growth now, but should begin to see value over time,” concludes the Credit Suisse report.