Re­liance In­dus­tries sees long-term fu­ture in petro­chem­i­cals

The Gulf Today - Business - - UAE & REGION -

NEW DELHI: Re­liance In­dus­tries, cur­rently In­dia’s sec­ond most valu­able listed com­pany, got rich by trad­ing fuel across Asia, Africa and Europe while ef­fec­tively ig­nor­ing its home mar­ket.

Re­liance’s re­finer­ies pro­cessed crude from the nearby Mid­dle East and sold fuel to fast-grow­ing mar­kets in North Asia in­clud­ing China, Ja­pan, South Korea and Tai­wan.

That be­gan to change when In­dia’s oil de­mand surged, over­tak­ing Ja­pan as the world’s third-big­gest con­sumer. Re­liance took more in­ter­est in the coun­try’s re­tail fuel sec­tor and has opened more than 1,300 ser­vice sta­tions.

This push into the do­mes­tic fuel mar­ket may stum­ble af­ter In­dia’s govern­ment im­posed cost con­trols on Oct. 4 on gaso­line and diesel prices to rein in re­cent record highs.

Re­liance’s shares plunged 6.9 per cent on the day of the an­nounce­ment and are down about 20 per cent since their record close on Aug. 28.

The de­cline has pushed Re­liance’s mar­ket cap­i­tal­i­sa­tion down to 6.64 tril­lion ru­pees ($90.47 bil­lion) and it is no longer In­dia’s most valu­able com­pany, sit­ting be­hind Tata Con­sul­tancy Ser­vices Ltd at 6.77 tril­lion ru­pees.

The price shock, driven by soar­ing crude im­port costs, an­gered con­sumers and trig­gered ri­ots by farm­ers, forc­ing the govern­ment to re­act at the cost of its re­fin­ers’ health.

For now, Re­liance is stay­ing with its re­tail plans de­spite the re­cent trou­ble.

“When prices are cut, you have to ef­fec­tively match it,” said Venkat­achari Srikanth, Re­liance’s joint chief fi­nan­cial of­fi­cer, dur­ing their earn­ings pre­sen­ta­tion on Oct.17. “We are not go­ing to let this al­ter broadly our strat­egy on re­tail petroleum.”

In line with that, Re­liance is plan­ning as many as 2,000 re­tail sta­tions with oil ma­jor BP Plc over the next three years, lo­cal me­dia re­ported on Tues­day.

Re­liance’s do­mes­tic push made sense in an Asian fuel mar­ket that is in­creas­ingly crowded with new refinery ca­pac­ity from the Mid­dle East, South­east Asia and China.

The new ca­pac­ity, com­bined with soar­ing crude prices, has eroded profit mar­gins for pro­duc­ing re­fined fu­els.

With the do­mes­tic mar­ket now also un­der pressure from price con­trols, some an­a­lysts have been spooked.

COM­PE­TI­TION

Sukrit Vi­jayakar, di­rec­tor of In­dian oil con­sul­tancy Tri­fecta said the govern­ment move could “be dis­as­trous for Re­liance.” The re­tail move puts Re­liance into com­pe­ti­tion against govern­ment con­trolled re­fin­ers like Bharat Petroleum Corp, Hin­dus­tan Petroleum Corp and In­dian Oil Corp, the coun­try’s big­gest re­finer.

Re­liance’s do­mes­tic strat­egy ini­tially won the back­ing of in­vestors and the re­tail fu­els group was touted by com­pany Chair­man Mukesh Am­bani in a speech at its an­nual gen­eral meeting in July.

Be­tween Jan­uary and Au­gust, Re­liance’s shares soared 45 per cent, far out­pac­ing the state-owned re­fin­ers as well as In­dia’s main stock index, the Nifty 50, which gained 12.5 per cent.

But ris­ing crude prices, which jumped from un­der $70 per bar­rel in early 2018 to around $85 in early Oc­to­ber, and a tum­bling ru­pee com­bined to push do­mes­tic fuel prices to records, un­der­min­ing Re­liance’s re­tail strat­egy de­spite some re­lief from a dip in crude prices in re­cent weeks.

Still, Ro­hit Ahuja, se­nior vice pres­i­dent of In­dia’s BOB Cap­i­tal Mar­kets, which has a buy rat­ing on Re­liance, said signs of an “oil price shock” in In­dia were “al­ready vis­i­ble.”

Re­liance may grad­u­ally moth­ball its re­tail sta­tions be­cause of the cost con­trols, said Mac­quarie Cap­i­tal Ltd An­a­lyst Aditya Suresh in a note on Oct. 5, though the bank ex­pects no mean­ing­ful im­pact on its earn­ings. Re­liance may be bet­ter placed to thrive on ex­ports de­spite the in­creas­ing com­pe­ti­tion in Asia and the Mid­dle East.

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