Reliance Petroelum 2009

Reliance petroleum will start its production in late 2008.

So its first full financial year of production will be FY 2010.

i.e. 1st April 2009 - 31st March 2010.

According to the official site, the production capacity of Reliance Petroleum will be 580000 barrels per day.

The profits of RPL will depend mainly on two factors.

-International crude oil prices and petrol prices.
-Rate of Indian Rupee.

0.58 million barrels a day = 211.7 million barrels a year.

An optimistic view - Reliance will have GRM (Gross Refining Margins) of $14 a barrel and US $ will be at Rs 41. (Reliance's refinery had a GRM of $15 last quarter and this is the best ever achieved by it.)

This will take the gross profit figures to Rs 12151 crore a year.

Reliance Petroleum has 450 crore shares. Thus eps (am assuming using GRMs) would be around 27.

Now how much PE should we give to a petroleum refinery?

Other refineries in India are trading in the 5-8 band, but lets give Reliance Petroleum a forward PE of 9. In that case, the stock price would be around Rs 240 by March 2009.

Now this is a very optimistic view. There is not much possibility of this happening. Rs 240 is the upper limit I would put on the stock.

For this to happen, both crude oil prices and US dollar will have to remain where they are right now.

If we assume GRMs to fall to $12 a barrel, US$ to be at Rs 36 and a PE of 8, the stock would be at Rs 160 in March 2009. (This is a more realistic target. RIL's refinery had a $12.4 margin last year.

The US$ may be even lower than 36, but I think RPL will be able to maintain margins around $12 a barrel.

A pessimistic view - $10 GRMs, USD at Rs 33 and PE of 8 => the stock would be at Rs 122 in March 2009.

There are lot of other factors that will decide the final profits, like the earnings of the Polypropylene plant, expenses, taxes etc. I am just making rough calculation from the GRMs.

Basically, the fortunes of Reliance Petroleum will depend a lot of state of the world economy. If the world economy slows down, petroleum prices will move down and so will RPL's margins. If US economy slows, down the US $ will go down too. I expect both to happen in the next few years.

the stock has risen much faster than what I expected.

the reason is that the refinery is expected to start production in early 2008 - a few months before what was initially planned.

A core sector company with a strong promoter, liquidity on the bourses and good potential for the future can prove to be a good investment for the long term. One company that fits the bill is Reliance Petroleum, the largest private sector refining company in India.

A part of the Reliance group which has been a good value creator for shareholders, Reliance Petroleum has reported a positive bottomline in the very first year of commercial operations and is also expected to declare its maiden dividend this year. It has already emerged as the largest private sector company in terms of sales and in the first year of its commercial production has overtaken its parent Reliance Industries. Over a one-year time frame the scrip will prove to be a good investment.
Reliance Petroleum has some advantages over other refineries:

-it will refine low grade crude oil to high grade products. these product sell at a premium and thus RPL will have better margins than many other refineries around the world.

-Reliance Petroleum will be an export oriented company. Being in an SEZ, will mean that it will have access to duty free imports of capital equipment and crude oil. it will also be expemt from various taxes and duties that a normal business has to pay.

plus no income tax for 5 years and and only 50% tax for next five years. (this applies only to the exports-based income).

-a recent report suggests that the world's crude oil production has peaked in 2006.
In the first nine months of the current year Reliance Petroleum has achieved sales of Rs 23,457 crore and a net profit of Rs 1,167 crore. In the process RPL has surpassed the sales of its parent Reliance Industries which had sales of Rs 23,457 crore during the same period. Operating profit before other income for the first nine months was Rs 2,209 crore resulting an operating margin of 9.42 per cent.

The company’s refinery operated at 101 per cent in the third quarter and at 96 per cent for the nine months of operation. This is quite commendable and compares favorably with the average rate of 93 per cent, which other Indian refineries operate at. The capacity utilization in North America is 91 per cent, Europe 88 per cent and Asia Pacific 99 per cent.

Outlook

Post de-control of the oil sector the success will depend on the marketing capabilities of the refineries. The company has understood the importance of marketing and has already applied for marketing rights for the controlled products, as it meets all the criteria specified in this regard by the government. As soon as the marketing of controlled products is decontrolled, expected by April 2002, the company will take appropriate steps. It is considering various options to enter the retail market.

Currently it has an agreement with marketing public sector undertakings (PSUs) till 2002 to market its products. Post de-regulation Reliance Petroleum will be in a much better positioned to enter the marketing segment given its substantial future cash flow position. Besides this Reliance Petroleum satisfies the eligibility criteria set by the Nirmal Singh Committee to enter the marketing segment. According to the committee, recommendation any company wishing to enter the marketing segment has to make a minimum investment of at least Rs 2000 crore in a refinery.

This gives RPL the edge as this restriction acts as an entry barrier for multinational companies wishing to enter the retail segment. The company has already indicated its interest in setting up its own marketing network or taking up an equity stake in state-owned marketing PSUs viz., BPCL, HPCL and IBP.

Currently, the company sells 60 per cent of its products to IOC, HPCL and BPCL at international prices with a credit period of just 10 days. The PSUs in turn recover the amount from the oil pool account. Post-decontrol the company has various options. It could continue with the existing arrangement or acquire a pure marketing company and even set up its own marketing network. Further, it could also enter a strategic tie-up with an MNC and set up a marketing network.