RIL: Cashing in on RPL

The cash generated by RPL can be used more effectively in a merged entity.

The most obvious reason for the possible merger of Reliance Petroleum with Reliance Industries (RIL) appears to be that when RPL starts generating cash, it would be easier to use that money in a merged entity. RIL would need resources for exploration and production activity as also to acquire oil assets and the cash that RPL will throw up in the next few years, will come in handy.

While RIL does have a 70 per cent stake in RPL, it would nevertheless be easier to use resources generated within the same entity. As of now, RPL is expected to turn in a net profit of around Rs 4,500 crore in 2009-10 and close to Rs 6,000 crore in 2010-11. RIL is expected to post a net profit of close to Rs 15,300 crore in the current year and around Rs 19,000 crore in 2009-10.

From a shareholder’s perspective, going by Reliance Industries’ (RIL) past record, it’s quite possible that the merger would favour RIL shareholders. The current market prices of the two companies suggest a swap ratio of 1:17. However, the Street believes that Chevron may sell back its 5 per cent stake in RPL at around Rs 60 per share. Should that happen, then that price may be used to arrive at the swap ratio, which would then work out to 1:21.

Since RIL already has a 70 per cent stake in RPL, the outlook for the merged entity would differ only in that it would have a greater exposure to refining. Gross refining margins (GRMs) in the region have moved up to around $5.5 a barrel in the last couple of months, but the medium term outlook for refining margins is not too positive and they are expected to be lower this year than in 2008.

Analysts say RIL has always managed better margins because of its ability to process cheaper and heavier crude oil as also make Euro-III-IV diesel which fetches better realisations. However, with global refining capacity is expected to expand in 2009-10 and demand unlikely to be able to absorb the fresh supply, margins may remain under pressure.