Reliance Industries sees long-term future in petrochemicals
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.
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.