25th April

RIL earnings growth muted

The article talks about the better then expected growth of Reliance Industries and its future prospects considering the fact that the worst part is over for oil industry. The company would also get the boost with discovery of gas in the KG basin.

The forth quarter performance of RIL has beaten the market expectations despite 1% net fall in profits and 25% in revenues. While gross refining margin fell from $15.5 per barrel to $9.9 per barrel Y-o-Y, it is still better then global benchmarks. Demand has contracted for hydro-carbon industry in both domestic and global markets as well as price softening of crude and products, both petroleum and petrochemical. Reduced production hasn’t helped. Refining and marketing business that accounted for 70% of company’s revenues has seen 31% fall in EBIT and 25% in revenues. But petrochem business has seen 31% decline in revenues but 17.5% increase in EBIT. E&P business also saw 5.8% growth in EBIT despite 11% drop in revenues. However, the worst is possibly over. The feeling is attributed largely to the recent beginning of gas production from KG basin as well as commissioning of new refinery. 2009 is expected to be a transformational year at least by the company CMD, Mukesh Ambani. The new peak gas production combined with increased demand in by the end 2009 would be a big boost for company’s topline. Company has tied up with fertilizer producers and is expected to sign up contracts with power plants and manufacturing industries. 

Finally, the merger of RPL with itself would also help with 25% of world’s complex refining capacity and greater bargaining power with respect to price and quality of crude would rise. Improved efficiency would be an added advantage in this volatile industry.

Shares as currency 

The article advocates for use of shares as a currency in certain cross-border transactions such as import of capital good and technology. Such facility would also help the companies to revive their investment plans. 

Indian companies have already been allowed the issue of equity shares in lieu of lump-sum fee, ECBs and capital goods imports after the approval from Foreign Investment Promotion Board. But wider use of shares as currencies would help cash-starved companies to fulfill their needs as well as revive their investment plans. Such an arrangement might result in better appreciation of shares of the buying company and the arrangement would be certainly better then barter system. But the only doubt here could be that in the current risk-averse environment there might be fewer takers for equity payment. However, this system can also bring two needy parties together. For example, there might be a company for want of capital goods but might not have enough cash for the purchase while on the other hand there might be a capital goods manufacturer who might not be getting and buyer in the current demand-starved economy. Share payment might be the right deal for both of them. Thus the arrangement has the potential to generate more economic activity in these times of liquidity crunch and credit freeze. The proposal can also be used for payment of salaries to employees. ESOPs are already there but companies can go one step further to make monthly payment of salaries in the form of stocks instead making them loose the entire salary altogether. Legal partnership firms already work on the basis of providing a percentage share of equity and profits to all partners.

However, in this entire exercise, care has to be taken that the interests of all stakeholders are protected.