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Reliance Industries Limited Financial Presentation April 18, 2000.

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Presentation on theme: "Reliance Industries Limited Financial Presentation April 18, 2000."— Presentation transcript:

1 Reliance Industries Limited Financial Presentation April 18, 2000

2 Performance Highlights Operating Environment Financial Performance Business Review Reliance Petroleum Power & Telecom Stock Buyback Programme Summary Index

3 Performance Highlights n Reliance continues to lead the Indian private sector with highest sales, profits, assets, and net worth n Record production volume of 8.9 million tonnes in the year 1999-2000 - an increase of 26% n Net external sales up 54% for the year n Rs. 25,000 crores (US$ 6 bn) Jamnagar refinery and petrochemicals complex completed in record time frame n Acquisition of control over Raymond Synthetics’ polyester capacity of 75,000 tonnes per year n Exports up 164% at Rs. 1,811 crores (US$ 415 mn) n 14 new oil and gas exploration blocks awarded - RIL the No. 1 E&P player in the private sector in India

4 Financial Highlights - Q4 1999-2000 SalesRs 6,594 crores $ 1,512 mn+83% Gross ProfitRs 1,593 crores $ 365 mn +88% Cash ProfitRs 1,284 crores $ 294 mn +95% Net ProfitRs 654 crores $ 150 mn +72% All-time record performance for the quarter - nearly 75-100% growth on all major financials

5 Financial Highlights - 1999-2000 SalesRs 20,301 crores$ 4,654 mm+40% EBDITRs 4,746 crores$ 1,088 mm+43% Cash ProfitRs 3,738 crores$ 857 mm+44% Net ProfitRs 2,403 crores$ 551 mm+41% EPSRs 22.4 / share$ 0.50 / share +25% Cash EPS Rs 34.6 / share$ 0.80 / share +27% Reliance continues to lead the Indian private sector - highest sales, profits, assets, and net worth

6 Operating Environment

7 Positive external balances, low inflation and stable FX rates will be the key themes in Asian economies in 2000-01 Positive Demand Environment in Asia

8 Economic Recovery in India The bulging FX reserves of US$ 37 billion, and the declining interest rate scenario, provide for a stable environment n GDP growth in India for the year 2000-01 is likely to be in the 6% - 7% range n Inflation rates are marginally higher than the previous year, but still in the 4% - 5% band n Long term interest rates have declined significantly - the 10 year Treasury rate is around 10.50% per annum n Foreign exchange reserves have crossed US$ 37 billion, imparting considerable stability to the Indian rupee

9 Crude Price Trends (Brent) High 32.75 Current 21.81 Low - 9 There are indications of a return to price stability in the crude markets: the 15 year average is US$ 18 - 20 range

10 Petrochemicals - Price Movements International Prices (US$ / T ) April 2000% above% below pricerecent bottomprevious peak PE710+60%-16% PP650+60%-33% PVC800+98%-6% POY1150+121%-38% PSF930+38%-49% PTA530+36%-52% PX 475+103%-67% MEG640+113%-8% Naphtha240+150%-18% Prices of most products are still significantly lower than 1995 peak prices - naphtha close to previous cycle high

11 Petrochemicals - Trends and Outlook n Petrochemicals demand in Asia has remained strong even at higher price levels - operating rates are high n Project cancellations/delays over the last few years bode well for regional demand - supply balance n New gas based plants coming up in the Middle East enjoy lower feedstock cost advantage, but have significant capital cost/production inefficiencies and freight penalty n Optimism that petrochemicals price and margin recovery will be sustained Globally competitive and fully integrated producers like RIL well positioned to benefit from the petrochemicals upcycle

12 International Feedstock Price Trends Average feedstock prices were sharply higher during the year - driven by the firm trend in crude prices (US$ / T ) Average Average% April% 1998-991999-00Change2000below pricepeak Crude ($/bbl)12.0521.87+81%21.93-33% Naphtha121199+64%240-18% EDC 160340+113%450-2%

13 International Product Price Trends (US$ / T ) Average Average%April 2000 1998-991999-00Change prices POY878964+10%1150 PSF671793+18%930 PTA365441+21%530 MEG373527+41%640 PE491650+32%710 PVC456662+45%650 PP453580+28%800 Average international product selling prices were generally 20% - 40% higher

14 Domestic Product Price Trends Domestic product selling prices, as in the past, tracked international trends ( Local prices in Rs. / kg ) Average Average% April 2000 1998-991999-00Changeprices POY56.360.9+8%63.6 PSF43.052.2+22%56.0 PTA23.128.2+22%32.1 MEG24.231.8+31%35.4 PE35.542.7+20%47.0 PVC28.437.9+34%41.0 PP31.737.7+19%39.5

15 Financial Performance

16 Income Statement for 1999-2000 Record performance despite steep increase in feedstock prices and high volatility in product prices

17 US GAAP Reconciliation The difference is mainly on account of change in method of depreciation, deferred taxation and foreign currency assets

18 Business Mix Reliance remains focussed on the petrochemicals business

19 Profitability Ratios Significant improvement in all key profitability ratios - OPM, NPM, and RONW

20 Liquidity Ratios Total Assets have increased to over Rs. 29,000 crores Debt:Equity ratio maintained at 0.88:1 Net interest cover up at 8.1 times

21 Growth in Production and Sales n Sales revenue growth of 39.5%, contributed by: –Impact of sales volume growth 22.1% –Impact of increase in average product selling prices 17.4% n Net external sales up 54% for the year n Robust growth in domestic demand - over 90% of production sold within India n Value added export opportunities captured Production volume increased 26% to a record level of 8.9 million tonnes

22 Stability of Operating Margins Operating margins improved to 20% This was the result of : n Strong volume growth n Higher product prices mitigating higher operation costs n Gains from productivity, cost control, and efficiencies n Higher degree of integration and value addition n Rationalisation of customs duties Ability to operate plants at peak rates and sell most of the production in the domestic markets, differentiates Reliance from other global petrochemical producers

23 Export Revenues Increase Sharply n RIL’s total exports increased 164% from Rs. 685 crores ($ 161 mn) to Rs. 1,811 crores ($ 415 mn) n Manufactured exports increased 116% from Rs. 685 crores ($ 161 mn) to Rs. 1,478 crores ($ 339 mn) n RIL has also entered into long term arrangements with RPL for exports of various petroleum products n During the year, RIL exported Rs. 333 crores ($ 76 mn) of petroleum products sourced from RPL Current export revenues alone provide nearly 4 times cover for RIL’s FX denominated interest liability

24 Export Revenues to Rise Further n Export revenues are likely to increase further in the year 2000-01 to $ 500 - 600 mn (Rs. 2200 - 2600 crores) n RIL’s requirement of feedstocks can be almost entirely sourced from the Jamnagar complex n RIL to have substantial net foreign exchange earnings in the year 2000-01 n Exports driven primarily by superior economics - thrust on value added exports and speciality grades Reliance to emerge as one of the largest manufacturer exporters in India

25 Export Revenues Trends RIL’s exports represent less than 10% of total revenues, even after a 20 times increase in absolute terms in 4 years

26 Conservative Financial Management n Top-end domestic AAA credit rating - international rating constrained by sovereign ceiling n RIL’s cash flows for less than 2 years are sufficient to extinguish its entire net debt n Foreign exchange risks largely eliminated - ECBs represent just over 2 years’ export revenues n RIL has repatriated FX of nearly US$ 800 mn (nearly Rs. 3,500 crores) from its offshore ECB proceeds RIL FX exposure additionally covered by the natural hedge in its petrochemicals business - rupee outlook also stable

27 Capex/ Expansion Framework n RIL will allocate upto 50% of its internal accruals over the next 3 years for capacity expansion/debottlenecking n Additional capacities to be implemented at around 50% - 60% of the current replacement cost of comparable assets n This will ensure lower capital intensity and attractive returns through the business cycle n Increased focus on specialities in new capacity creation RIL will implement necessary capex plans and acquisition strategies to maintain and enhance its leadership in rapidly growing domestic markets

28 Capex/Expansion Plans n Reliance intends to double its polyester capacity in 3 years, through acquisitions and fresh capacity creation n Debottlenecking of naphtha cracker planned from 750,000 tpa to 1 million tpa of ethylene n Plans for PE debottlenecking, and setting up new capacity for PTA and MEG in line with polyester expansion RIL’s capex is unlikely to exceed Rs. 1,000 crores (approx. US$ 250 million) in the year 2000-01

29 Capex for 2000-01 will be less than 80% of depreciation, indicating the strong free cash flow generation 2000-01 Capex Covered by Depreciation

30 Free cash flows are increasing as profits rise and the proportionate spending on capex reduces Free Cash Flows are Rising

31 Future capex, as a proportion of Total Assets, will be significantly lower - less than 5% for 2000-01 Capex Trends vis-à-vis Total Assets

32 Post Jamnagar, entire asset base is generating returns - CWIP has declined to insignificant levels CWIP Declines to Rs. 300 Crores

33 Tax Liability Maintained at 2%-4% PBT RIL’s tax liability has been maintained in the 2%-4% range since MAT imposition - MAT rate now reduced to 7.5%

34 Business Review

35 Global Rank POY4 PSF5 PTA6 PX3 PP6 PE (swing)10 Globally Ranked Capacities RIL has emerged as a significant global producer of petrochemicals in all its major products

36 n Among top 10 producers globally of all its major products n Unique vertical integration from crude refining to fabrics and plastics - capturing value addition of over 1000% n Deriving over 90% revenues from domestic market n Leading the market in all its product categories with market shares ranging from 47% to 87% n Globally competitive capital and operating cost position Reliance’s Leading Business Position RIL alone contributes over 1% of India’s GDP and 1.5% of government’s revenue receipts

37 Growing Market Shares n Polyester market share expansion driven by acquisitions n Plastics market share maintained in the face of additions to industry capacity RIL’s market share1998-991999-2000% change Polyester44%47%+3% (PFY, PSF, PET) Fibre Intermed. 84%87%+3% (PTA, MEG, PX) Plastics56%56%- (PE, PP, PVC)

38 Robust Growth in Domestic Demand HistoricFuture growth CARG Estimates Growth Drivers (last 5 yrs)(per annum) Polyester14% 8% - 15%- Lower prices (PFY, PSF, PET) - Substitution of cotton Fibre Intermed. 15% 8% - 15%- Growth in polyester PTA, MEG, PX) demand Plastics12%10% - 15%- 8% cut in excise (PE, PP, PVC) - JPMA implementation - Edible oil packaging - Telecom (Cables and Ducting) Domestic demand growth momentum likely to be maintained in double digit range

39 Excise Duty Cuts to Boost Demand n The Union Budget for 2000-01 has reduced excise duties on plastics by 8%, from 24% to 16% n For the first time, this brings excise duties on plastics to the same level as alternative packaging materials n The cost advantage enjoyed, on this account, by aluminium, glass, etc. now stands removed n Consumer choice to be driven solely on product attributes, and not on artificial duty-based cost considerations n Lower end prices to customers to boost demand Excise duty reduction on plastics has removed the cost advantage enjoyed by alternative packaging materials - demand likely to receive a major boost

40 Foodgrains Packaging opened to Plastics n Foodgrains/sugar packaging in the country has been opened up to plastics, for the first time in decades n Earlier, all foodgrains/sugar were to be packaged in jute bags, despite 100% cost penalty over PE/PP woven sacks n Jute Packaging Material Act 1987 (JPMA) relaxed w.e.f. March 31, 2000 - limit for foodgrains/sugar reduced from 100% to 90%, and urea from 20% to 15% n Whole new markets opened up for PE/PP - significant increase in consumption n Jute availability inadequate for growing foodgrains/sugar production - growth of 140 mn tonnes in last 10 years A single new market for packaging of foodgrains/sugar has opened, unlocking vast demand potential for PE/PP

41 Strong Potential for Demand Growth Chinese consumption at 3-4 times current Indian levels, indicates potential for sustained demand growth Total demand in ‘000 tonnes/year PFY & PSFPP, PE, PVC India13052308 China375511785 World1526877012

42 Business Review - Polyester n Domestic polyester demand growth at 7% per annum n Reliance’s volumes increased faster, partly owing to acquisition of polyester capacity

43 Business Review - Plastics n Domestic demand increased at 7% per annum n RIL’s volumes increased industry growth

44 Business Review - Oil and Gas n Oil and gas business now accounts for 2.4 % of revenues

45 New Oil & Gas Initiative n RIL has been awarded a total of 14 offshore blocks under GOI’s New Exploration Licencing Policy (NELP) n Deep and shallow water offshore blocks awarded on the basis of international competitive bidding n RIL the No. 1 E&P player in the private sector in India n RIL’s exploration acreage exceeds 1,00,000 sq. kms off the West and East coast of India n RIL to invest approximately Rs. 200 crores ($ 50 million) per year over the next 3 - 4 years in exploration activities RIL is leveraging on the in-house knowledge base and skill sets developed in the producing Panna, Mukta, and Tapti, oil and gas fields

46 Significant Incentives - NELP n US$ denominated prices for oil and gas n No signature, discovery or production bonus n No mandatory state participation n No cess on oil and/or gas n Significantly lower royalties n Freedom to market the oil & gas production in the domestic market n No customs duty on the items imported for the project n 100% cost recovery for the cost incurred n 100% tax deduction for all expenditure (incl. capex)

47 Speciality as %age of total volumePremium over 1995-961999-20002000-01commodity PE5%13%26%12% PPNA17%30%13% POYNil10%22%14% PSF9%41%45%10% Moving up the Value Chain - Specialities Near doubling of speciality grades to differentiate RIL from commodity producers, enhance margins, enable expansion into new markets, and deliver superior overall value

48 Tariffs - WTO Commitments n Import tariffs on POY, PSF have already reached WTO bound rates n Tariffs on polymers likely to also gradually decline to 20% range in the next 3-5 years CurrentWTO Bound import tariffs Rates POY20%20% PSF20%20% PTA20%40% MEG20%40% PE30%None PP30%None PVC30%40%

49 Strong Performance under Declining Tariffs Strong performance in a declining import tariff environment: global competitiveness demonstrated

50 Reliance Petroleum

51 RPL - World’s Largest Grassroots Refinery n World’s largest grassroots 27 million tpa refinery completed ahead of schedule n The No. 1 private sector player, with over 25% share in the domestic market, and maximum value addition n The only Indian refinery capable of producing diesel with <0.05% sulphur and gasoline with <1% benzene n Currently marketing controlled products through oil PSUs - approx. 25% - 30% consumed within the group RPL to benefit from the hugely deficit and rapidly growing Indian markets

52 Global Competitiveness and Outlook n Conservative funding of project cost of Rs. 14,250 crores ($ 3.4 bn) with debt:equity ratio of less than 0.9:1 n Significant benefits from 30% - 50% lower per unit capital costs compared to large refineries commissioned in the region in recent times n Based on full operating rates, RPL to achieve turnover of over Rs. 25,000 crores (US$ 5.7 bn) in FY 2000-01 n RPL to rank among top 5 private sector companies in India on all major financial parameters in the first year RPL is the most valuable petroleum company in Asia with market cap of over Rs. 28,000 crores (US$ 6.5 bn)

53 Power and Telecom

54 n Cellular services now available in 36 cities: current subscriber base of over 75,000 n Average revenues per subscriber comparable to metro levels at Rs. 1000-1100 per month n Subscriber base growing at over 100% per annum n Reliance’s cellular services span 7 circles, 13 states, 1/3rd of India’s land mass and 1/3rd of India’s population n Implementation of basic services in progress in Gujarat Reliance Telecom - Update Reliance Telecom’s cellular operations EBITDA positive - unlocking of value through listing at appropriate time

55 n 500 MW Jamnagar and 447 MW project Patalganga IPPs, to achieve financial closure in FY 2000-2001 n Commissioning in 24 - 36 months from ‘Zero’ date n RIL’s contribution unlikely to exceed Rs. 325 crores (US$ 75 million) per year over the next 3 years n Jamnagar IPP to add value to bottom of the barrel output - petroleum coke, from the RPL refinery n Attractive regulatory regime for IPPs ensures healthy profitability and offers a steady stream of income Reliance Power - Update Reliance to leverage its core competence and strong presence in the energy-oil-petrochemicals chain

56 Stock Buyback

57 Objectives of Share Buyback n Return cash to shareholders in tax efficient, and investor friendly, manner - no sacrificing growth opportunities n Manage stock price volatility, lower beta, and attract longer term investors n Optimise Weighted Average Cost of Capital (WACC), thereby enhancing global competitiveness, and ROE n Achieve higher all-round valuation, enabling use of RIL stock in the long term as currency for acquisitions Achieve increase in RIL’s market capitalisation, thereby contributing to enhancement of overall shareholder value

58 Domestic Stock Price Performance % change PeriodDateRIL PriceAbsoluteRelative to Sensex Current17 Apr 2000297 Calendar YTD31 Dec 199923427+ 29 1 year17 Apr 1999122144+ 98 2 year17 Apr 199819949+ 33 3 year17 Apr 1997142108+ 76 5 year17 Apr 1995144107+ 65 10 year17 Apr 199031858+ 312 RIL stock price has consistently outperformed the Sensex over all time frames

59 Returns to GDR/FCCB Investors % change IssueDateIssue Current ($)AbsoluteRelative Price ($) Price to Sensex GDR 1May 19928.1720145+ 133 GDR 2Feb 199411.75 2070+ 80 FCCBNov 19939.18 20118+ 83 The RIL GDR is trading at US$ 20, translating into a stock price of over Rs. 435 per share, and representing a premium of nearly 50% to the underlying domestic stock price

60 RIL’s Declining Beta Consistent decline in RIL’s Beta reflects reduced volatility - reduction in weighted average cost of capital (WACC) Source : Morgan Stanley 2 1.1 1.3

61 Regulatory Framework n Buyback can not exceed 25% of paid up capital and free reserves - approx. Rs. 3,000 crores for RIL n Buyback in any financial year can not exceed 25% of the equity of Rs. 1,053 crores - approx. 26 crore shares n Shares bought back have to be cancelled, and cannot be held as Treasury stock for re-issue n Post-buyback, total Debt/Equity ratio not to exceed 2:1 - RIL is below 0.9:1 RIL comfortably meets all regulatory parameters for the stock buyback programme

62 Highlights of RIL Buyback Proposal n Maximum amount not exceeding Rs. 1,100 crores (US $ 250 million) - largest ever share buyback in India n Maximum buyback price of Rs. 303 per share represents 22% premium to average of one-year trading price range n Also represents 52% premium to recent low of Rs. 199 on March14, 2000, less than 20 trading sessions ago n Judicious exercise of share buyback at upto Rs. 303 per share, to contribute to maximisation of shareholder value RIL will be implementing the largest ever stock buyback programme in India

63 Highlights of RIL Buyback Proposal n RIL will adopt the transparent “open market purchases” methodology for the buyback, with full disclosures n There will be no negotiated deals, spot transactions, or any private arrangements n Promoters will not offer their shares under the buyback programme n The promoters may continue with “creeping” acquisition of shares during the buyback programme RIL’s promoters will not offer their shares under the buyback programme

64 No Equity Offering for 2 Years n As per prevailing regulations, RIL cannot make a fresh offer of equity shares, for any purpose, for a period of 2 years from the date of completion of the stock buyback n RIL has not made an equity offering for almost 6 years - in all RIL would not have issued equity for 8-9 years n During this period, RIL has increased capacities to nearly 10 million tpa, maintaining its debt:equity below 1:1 n RIL can issue bonus shares during the 2 year lock-up period, and/or announce stock splits RIL cannot make a fresh offering of equity shares for 2 years, for any purpose, including mergers and acquisitions

65 Exponential Growth - No Equity Offering RIL has achieved exponential growth in the past 6 years without any fresh equity offerings

66 Value Creation through Buyback Completion of RIL’s buyback programme at upto Rs. 303 per share will lead to, at the minimum : n 2.3% rise in EPS for FY 2000-01 n Higher EPS growth of 36.4% (against current estimates of 33.4%) in next 12 months n 70 basis points expansion in ROE to 22.9% in FY 2000-01 n 20% rise in value added (ROCE—WACC) through a higher return on capital, and lower cost of capital Source: Morgan Stanley Dean Witter estimates The buyback, upto Rs. 303 per share, will enhance EPS/ROE, and lead to shareholder value enhancement

67 Positive Signals to Shareholders Buyback proposal is intended to send out clear signals to RIL investors n RIL will reward shareholders by returning cash to them n High growth to continue n Lower stock price volatility n Lower Weighted Average Cost of Capital (WACC), enhancing global competitiveness RIL will endeavour to protect the interests of long term shareholders, by neutralising speculative forces

68 Summary

69 n Stability returning to the overall petrochemicals price environment with recent drop in crude prices n Improving outlook for global and regional petrochemicals industry - positive demand momentum coupled with a more disciplined approach to capacity creation n RIL has implemented significant expansion in capacity close to the bottom of the cycle - net external sales up 54% this year n RIL well positioned to participate in the industry upcycle with nearly 10 mn tpa capacity, global competitiveness and fully integrated operations Expansion in petrochemicals margins will lead to significantly higher returns for RIL

70 Summary n RIL is generating a ROCE (Return on Capital Employed) of 22% on its operating businesses n Significant hidden values in investments in RPL, BSES, L&T, RCL, Telecom and Oil and Gas - RIL share value estimated at approx. Rs. 600 per share n Future cash flows will be used in accordance with the capital allocation framework enunciated by the company n Stock buyback demonstrates confidence of management in future prospects, and undervaluation of RIL stock The buyback demonstrates the management’s confidence on future prospects and under-valuation of the RIL stock

71 Reliance Industries Limited India’s World Class Corporation


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