Tuesday, May 10, 2011
Knight Ridder/Tribune Business News
by Aveek Datta, Mint, New Delhi
The Mukesh Ambani-controlled Reliance Industries Ltd (RIL) has used its strong cash flows to step up funding to new businesses such as shale gas and digital services, kicking off its next investment cycle.
RIL's 2010-11 annual report shows that the oil-to-yarn-to-retail conglomerate invested '7,593 crore in its subsidiaries and associate companies in fiscal 2011, almost three times the investment made in 2010. Net loans and advances given to these companies stood at '5,418.46 crore, against a receipt of '2820.43 crore from them in 2010.
Most of RIL's investments in subsidiaries and associate firms the last fiscal were driven by its fledgling shale gas operations in the US, a company official said. He did not want to be identified.
"We will augment our commitment to the Indian markets by investing in new petrochemical capacity, organized retailing and digital services," Ambani said in his letter to shareholders.
Overall, the company in 2011 made investments worth '37,651.54 crore, 62% higher than in 2010. This included a '5,897 crore investment in various mutual funds.
RIL put '2,207.70 crore in a wholly owned subsidiary, Reliance Exploration and Production Mauritius Ltd--the vehicle through which RIL holds its stakes in the three shale gas joint ventures in the US. "The investments comprise part payments that we were required to make upfront payments as well as guarantees for the deferred payments," the official said.
The increase in loans and advances are also mostly linked to the firm's shale gas venture as they have been used to make the equity payments.
RIL recorded an around 10-fold increase in the financial guarantees that it extended on behalf of associates and subsidiaries, at '21,637.59 crore. Apart from guaranteeing deferred payments for its shale gas partnerships, the company has also furnished guarantees against future cash calls to be made by the joint venture partners of its wholly owned subsidiary Reliance Holding USA Inc. to the tune of '9,409.55 crore, RIL's annual report said. Reliance Holding USA had issued bonds worth $1.5 billion ('6,705 crore today) in October.
In a span of five months till August, RIL acquired three shale gas assets in the US for a total consideration of around $3.44 billion.
"The JVs (joint ventures) are expected to accrue resources in excess of 10 tcfe (trillion cu. ft equivalent of gas) and make a meaningful contribution to our earnings within the next few years," Mukesh Ambani told RIL shareholders.
According to analysts, with the kind of cash flow that RIL is expected to generate, high levels of investment are likely in the coming quarters as well.
Reliance may have as much as $22 billion in cash and cash equivalents by 2012, including payments from BP Plc and an estimated cash profit of $8 billion in the next fiscal year, according to a 22 February report by HSBC Securities and Capital Markets (India) Pvt. Ltd.
RIL had said during the announcement of its January-March quarter financial results that it had already received an initial $2 billion from BP, which is being treated as a current liability pending regulatory approval to the deal.
"RIL will continue to show high investment figures as it has entered a number of new ventures," said S.P. Tulsian, a Mumbai-based independent stock market analyst. "In shale gas, RIL might reach the maximum level of investment in three to four years, while for broadband it should happen in 24 months."
Some brokerages, however, remain sceptical about RIL's ability to deploy the cash its operations have generated.
"(RIL's) management acknowledged that utilization of cash remained a key challenge," a 22 April Citigroup Global Markets Inc. report stated.
"While RIL had already decided to use a part of this (cash) for pursuing organic growth opportunities...management reiterated that a part of this would be used for inorganic opportunities as well," Citi analysts Saurabh Handa and Graham Cunningham noted.
During the last fiscal, RIL also made a major investment of '4,155.99 crore in Infotel Broadband Services Ltd, the pan-India winner of broadband wireless spectrum that it acquired in June, marking the conglomerate's re-entry into telecom.
Interestingly, RIL did not make any new equity investment in its retail ventures. RIL's investment in the equity shares of Reliance Retail Ltd as on 31 March was '5,220 crore, the same as at the end of fiscal 2010.
Tulsian said RIL's retail arms did not receive any fund infusion as either the firm was going slow on retail expansion or they may have started generating enough cash on their own and could have even achieved cash break-even, though they reported net losses for the last fiscal.
After reaping the benefits of its last value creation cycle in 2009-10 by redeeming investments in subsidiaries and associates to yield '6,482.55 crore, there was negligible sale of similar investments 2011.
Over the last fiscal, RIL's shares have underperformed the broader market. Share prices of RIL lost 2.5% in 2010-11, while the benchmark equity index of the Bombay Stock Exchange, Sensex, gained 10.94%.
On Monday, RIL's share price gained 0.31% to close at '958.35 per share, while the Sensex rose 0.05% to close at 18,528.96 points.
Copyright (c) 2011, Mint, New Delhi. Distributed by McClatchy-Tribune Information Services.
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