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Reliance Industries Limited Financial Presentation
April 18, 2000
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Index Performance Highlights Operating Environment
Financial Performance Business Review Reliance Petroleum Power & Telecom Stock Buyback Programme Summary
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Performance Highlights
Reliance continues to lead the Indian private sector with highest sales, profits, assets, and net worth Record production volume of 8.9 million tonnes in the year an increase of 26% Net external sales up 54% for the year Rs. 25,000 crores (US$ 6 bn) Jamnagar refinery and petrochemicals complex completed in record time frame Acquisition of control over Raymond Synthetics’ polyester capacity of 75,000 tonnes per year Exports up 164% at Rs. 1,811 crores (US$ 415 mn) 14 new oil and gas exploration blocks awarded - RIL the No. 1 E&P player in the private sector in India
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Financial Highlights - Q4 1999-2000
Sales Rs 6,594 crores $ 1,512 mn +83% Gross Profit Rs 1,593 crores $ 365 mn +88% Cash Profit Rs 1,284 crores $ 294 mn +95% Net Profit Rs 654 crores $ 150 mn +72% All-time record performance for the quarter - nearly % growth on all major financials
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Financial Highlights - 1999-2000
Sales Rs 20,301 crores $ 4,654 mm +40% EBDIT Rs 4,746 crores $ 1,088 mm +43% Cash Profit Rs 3,738 crores $ mm +44% Net Profit Rs 2,403 crores $ mm +41% EPS Rs / share $ / share +25% Cash EPS Rs / share $ / share +27% Reliance continues to lead the Indian private sector - highest sales, profits, assets, and net worth
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Operating Environment
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Positive Demand Environment in Asia
Positive external balances, low inflation and stable FX rates will be the key themes in Asian economies in
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Economic Recovery in India
GDP growth in India for the year is likely to be in the 6% - 7% range Inflation rates are marginally higher than the previous year, but still in the 4% - 5% band Long term interest rates have declined significantly - the 10 year Treasury rate is around 10.50% per annum Foreign exchange reserves have crossed US$ 37 billion, imparting considerable stability to the Indian rupee The bulging FX reserves of US$ 37 billion, and the declining interest rate scenario, provide for a stable environment
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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$ range
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Petrochemicals - Price Movements
International Prices (US$ / T ) April 2000 % above % below price recent bottom previous peak PE % -16% PP % -33% PVC % -6% POY % -38% PSF % -49% PTA % -52% PX % -67% MEG % -8% Naphtha % -18% Prices of most products are still significantly lower than 1995 peak prices - naphtha close to previous cycle high
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Petrochemicals - Trends and Outlook
Petrochemicals demand in Asia has remained strong even at higher price levels - operating rates are high Project cancellations/delays over the last few years bode well for regional demand - supply balance 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 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
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International Feedstock Price Trends
(US$ / T ) Average Average % April % Change 2000 below price peak Crude ($/bbl) % % Naphtha % % EDC % % Average feedstock prices were sharply higher during the year - driven by the firm trend in crude prices
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International Product Price Trends
(US$ / T ) Average Average % April 2000 Change prices POY % 1150 PSF % 930 PTA % 530 MEG % 640 PE % 710 PVC % 650 PP % 800 Average international product selling prices were generally 20% - 40% higher
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Domestic Product Price Trends
( Local prices in Rs. / kg ) Average Average % April 2000 Change prices POY % 63.6 PSF % 56.0 PTA % 32.1 MEG % 35.4 PE % 47.0 PVC % 41.0 PP % 39.5 Domestic product selling prices, as in the past, tracked international trends
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Financial Performance
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Income Statement for Reported net profit has been impacted to the extent of Rs billion (US $ 25 million) by the additional operating costs, incurred till December 31, 1998, as a result of the accident to the SBM system. Claims of Rs billion (US$ 57 million) for physical damage, loss of revenue, increased cost of working, and other like losses, have been lodged with insurance companies. Record performance despite steep increase in feedstock prices and high volatility in product prices
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US GAAP Reconciliation
The difference is mainly on account of change in method of depreciation, deferred taxation and foreign currency assets
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Reliance remains focussed on the petrochemicals business
Business Mix Reliance remains focussed on the petrochemicals business
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Profitability Ratios Reliance’s total debt:equity ratio (based on gross, long term and short term, debt) continues to remain a healthy 0.94:1. Net gearing, after netting off cash and liquid assets, stands at a very conservative 33%. Net interest cover has improved to 6.6 times. The net debt to cash flow at 1.8 means Reliance’s internal cash flows for less than 2 years are sufficient to wipe out the company’s entire debt liability. Strong liquidity ratios compare favourably with leading global chemical companies - an important competitive advantage over most regional producers with weaker financial fundamentals. Significant improvement in all key profitability ratios - OPM, NPM, and RONW
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Liquidity Ratios Total Assets have increased to over Rs. 29,000 crores
Reliance’s total debt:equity ratio (based on gross, long term and short term, debt) continues to remain a healthy 0.94:1. Net gearing, after netting off cash and liquid assets, stands at a very conservative 33%. Net interest cover has improved to 6.6 times. The net debt to cash flow at 1.8 means Reliance’s internal cash flows for less than 2 years are sufficient to wipe out the company’s entire debt liability. Strong liquidity ratios compare favourably with leading global chemical companies - an important competitive advantage over most regional producers with weaker financial fundamentals. 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
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Growth in Production and Sales
Sales revenue growth of 39.5%, contributed by: Impact of sales volume growth % Impact of increase in average product selling prices % Net external sales up 54% for the year Robust growth in domestic demand - over 90% of production sold within India Value added export opportunities captured Production volume increased 26% to a record level of 8.9 million tonnes Production volumes increased 33% to a record level of 5.27 million tonnes in the first nine months of This is despite the temporary dislocation in feedstock supplies at the Hazira petrochemicals complex in October 1998. Total production volume slated to touch nearly 7 million tonnes for the full year - final production volume for the year likely to be 20% higher than beginning of the year estimates. Sales revenues were up 11% at Rs billion (US$ 2.6 billion) in the first nine months. This comprised of the impact of volume growth at 23%, partially offset, to the extent of 12%, by the decline in average product selling prices. Reliance sold 95% of its production within India. Value added export opportunities selectively pursued with export revenues increasing 145% to Rs billion (US $ 121 million). Exports focussed on quality conscious markets of US and Europe, in recognition of the superior quality of Reliance’s products.
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Stability of Operating Margins
Operating margins improved to 20% This was the result of : Strong volume growth Higher product prices mitigating higher operation costs Gains from productivity, cost control, and efficiencies Higher degree of integration and value addition 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 Operating margin remained largely stable at around 19%, even after considering the higher operational costs incurred as a result of the damage to the SBM. Key factors, limiting the impact of an adverse operating environment, were: - Strong volume growth - total production volumes increased 33%, from 3.95 million tonnes to 5.27 million tonnes. - Sharp decline in feedstocks’ prices, offsetting the decline in product selling prices. - High degree of integration and value addition. - Gains from the continuing focus on productivity and cost reduction; and - Depreciation of the Indian rupee. Reliance has the distinction of not cutting operating rates even once over the last almost 2 years of Asian crisis - a significant competitive advantage.
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Export Revenues Increase Sharply
RIL’s total exports increased 164% from Rs. 685 crores ($ 161 mn) to Rs. 1,811 crores ($ 415 mn) Manufactured exports increased 116% from Rs crores ($ 161 mn) to Rs. 1,478 crores ($ 339 mn) RIL has also entered into long term arrangements with RPL for exports of various petroleum products During the year, RIL exported Rs. 333 crores ($ 76 mn) of petroleum products sourced from RPL Maintaining top end ratings from domestic as well as international credit rating agencies is a stated objective of Reliance. Reliance is India’s only company with a constrained international rating. This means international credit rating of RIL’s overseas debt instruments would be higher than Moody’s Ba2, if it were not capped at that level by India’s credit rating. Low net gearing and net debt to cash flow ratios are reflective of the conservative financial policies being pursued by the company. International borrowings of $ 1.3 billion completely hedged with matching dollar assets held offshore by Reliance. Annual foreign debt service obligations of about $ 100 million are more than adequately covered by the company’s export revenues alone. Current export revenues alone provide nearly 4 times cover for RIL’s FX denominated interest liability
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Export Revenues to Rise Further
Export revenues are likely to increase further in the year to $ mn (Rs crores) RIL’s requirement of feedstocks can be almost entirely sourced from the Jamnagar complex RIL to have substantial net foreign exchange earnings in the year Exports driven primarily by superior economics - thrust on value added exports and speciality grades Maintaining top end ratings from domestic as well as international credit rating agencies is a stated objective of Reliance. Reliance is India’s only company with a constrained international rating. This means international credit rating of RIL’s overseas debt instruments would be higher than Moody’s Ba2, if it were not capped at that level by India’s credit rating. Low net gearing and net debt to cash flow ratios are reflective of the conservative financial policies being pursued by the company. International borrowings of $ 1.3 billion completely hedged with matching dollar assets held offshore by Reliance. Annual foreign debt service obligations of about $ 100 million are more than adequately covered by the company’s export revenues alone. Reliance to emerge as one of the largest manufacturer exporters in India
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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
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Conservative Financial Management
Top-end domestic AAA credit rating - international rating constrained by sovereign ceiling RIL’s cash flows for less than 2 years are sufficient to extinguish its entire net debt Foreign exchange risks largely eliminated - ECBs represent just over 2 years’ export revenues 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
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Capex/ Expansion Framework
RIL will allocate upto 50% of its internal accruals over the next 3 years for capacity expansion/debottlenecking Additional capacities to be implemented at around 50% - 60% of the current replacement cost of comparable assets This will ensure lower capital intensity and attractive returns through the business cycle Increased focus on specialities in new capacity creation Majority of key customers of Reliance’s polyester and plastics have been with the company for a long time, indicating high degree of customer satisfaction and strong brand equity. Number of customers lost usually represents a fractional percentage figure in any given year for major products. For instance, in plastics, the PE and PP businesses did not lose even a single customer in , whereas in polyester, the PFY and PSF businesses together lost 11 existing customers. New customers continue to come to Reliance at an ever increasing pace - in , the number of direct polyester and plastics customers increased by 26% and 27% respectively. Majority of the top 100 consumers of plastics and polyester in India buy from Reliance - 100% of the top consumers of PE and PP bought from Reliance Similar numbers for PSF and PFY stand at 95% and 64% respectively. Excellent credit quality of customers is reflected in quick conversion of receivable into cash, and low working capital requirement. Franchise power provides substantial marketing leverage in home markets - clearly a long term competitive advantage and an effective entry barrier. RIL will implement necessary capex plans and acquisition strategies to maintain and enhance its leadership in rapidly growing domestic markets
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Capex/Expansion Plans
Reliance intends to double its polyester capacity in 3 years, through acquisitions and fresh capacity creation Debottlenecking of naphtha cracker planned from 750,000 tpa to 1 million tpa of ethylene 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
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2000-01 Capex Covered by Depreciation
Reported net profit has been impacted to the extent of Rs billion (US $ 25 million) by the additional operating costs, incurred till December 31, 1998, as a result of the accident to the SBM system. Claims of Rs billion (US$ 57 million) for physical damage, loss of revenue, increased cost of working, and other like losses, have been lodged with insurance companies. Capex for will be less than 80% of depreciation, indicating the strong free cash flow generation
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Free Cash Flows are Rising
Reported net profit has been impacted to the extent of Rs billion (US $ 25 million) by the additional operating costs, incurred till December 31, 1998, as a result of the accident to the SBM system. Claims of Rs billion (US$ 57 million) for physical damage, loss of revenue, increased cost of working, and other like losses, have been lodged with insurance companies. Free cash flows are increasing as profits rise and the proportionate spending on capex reduces
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Capex Trends vis-à-vis Total Assets
Reported net profit has been impacted to the extent of Rs billion (US $ 25 million) by the additional operating costs, incurred till December 31, 1998, as a result of the accident to the SBM system. Claims of Rs billion (US$ 57 million) for physical damage, loss of revenue, increased cost of working, and other like losses, have been lodged with insurance companies. Future capex, as a proportion of Total Assets, will be significantly lower - less than 5% for
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CWIP Declines to Rs. 300 Crores
Reported net profit has been impacted to the extent of Rs billion (US $ 25 million) by the additional operating costs, incurred till December 31, 1998, as a result of the accident to the SBM system. Claims of Rs billion (US$ 57 million) for physical damage, loss of revenue, increased cost of working, and other like losses, have been lodged with insurance companies. Post Jamnagar, entire asset base is generating returns - CWIP has declined to insignificant levels
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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%
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Business Review
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Globally Ranked Capacities
Global Rank POY 4 PSF 5 PTA 6 PX 3 PP 6 PE (swing) 10 RIL has emerged as a significant global producer of petrochemicals in all its major products
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Reliance’s Leading Business Position
Among top 10 producers globally of all its major products Unique vertical integration from crude refining to fabrics and plastics - capturing value addition of over 1000% Deriving over 90% revenues from domestic market Leading the market in all its product categories with market shares ranging from 47% to 87% Globally competitive capital and operating cost position RIL alone contributes over 1% of India’s GDP and 1.5% of government’s revenue receipts
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Growing Market Shares RIL’s market share % change Polyester 44% 47% +3% (PFY, PSF, PET) Fibre Intermed. 84% 87% +3% (PTA, MEG, PX) Plastics 56% 56% - (PE, PP, PVC) Polyester market share expansion driven by acquisitions Plastics market share maintained in the face of additions to industry capacity
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Robust Growth in Domestic Demand
Historic Future growth CARG Estimates Growth Drivers (last 5 yrs) (per annum) Polyester 14% 8% - 15% - Lower prices (PFY, PSF, PET) Substitution of cotton Fibre Intermed. 15% 8% - 15% - Growth in polyester PTA, MEG, PX) demand Plastics 12% 10% - 15% - 8% cut in excise (PE, PP, PVC) JPMA implementation Edible oil packaging - Telecom (Cables and Ducting) Demand growth in domestic markets continues to be strong - a key factor that differentiates the India from most of the countries in the region. Demand has grown at 10%-15% over the last 5 years for most of Reliance’s products, and similar rates of growth are forecast for the future as well. Sharply lower unit prices to the consumer, and substitution of cotton, are the key themes driving the growth in domestic demand of polyester. Sustained decline in international prices, and sharp cuts in excise and custom duties, have led to polyester becoming substantially cheaper that cotton. This corrects a historic anomaly, and integrates India with the global trends. Excise duty on PFY has been cut from over 100% in 1992 to about 35% currently. Similarly, import tariffs on PFY have come down from over 150% to 35% over the same time frame. As a result, the price of PFY to the consumer has dropped sharply from over Rs. 170/ kg to about Rs. 70/kg since Similarly, price of PSF to consumer has fallen from over Rs. 80/kg to about Rs. 50/kg. In the mean time, price of cotton has increased from Rs. 40/kg to Rs. 60/kg, with the price of cotton yarn rising from Rs. 60/kg in 1992 to over Rs. 100/kg currently. This reversal in the relationship between cotton and polyester prices has led to the blending ratios in textiles shifting in favour of polyester. This factor is likely to continue to drive polyester demand growth well into the future. Demand for plastics is driven primarily by lower prices, substitution of traditional materials, and changing consumer lifestyles. The move towards freeing cement, fertiliser, and other commodities from the provisions of the Jute Packaging Mandatory Act (JPMA) and the requirement of mandatory packaging of edible oils, are likely to be substantial demand drivers in the future. Reliance’s new PP plant will be well positioned to capitalise on these demand growth opportunities. Domestic demand growth momentum likely to be maintained in double digit range
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Excise Duty Cuts to Boost Demand
The Union Budget for has reduced excise duties on plastics by 8%, from 24% to 16% For the first time, this brings excise duties on plastics to the same level as alternative packaging materials The cost advantage enjoyed, on this account, by aluminium, glass, etc. now stands removed Consumer choice to be driven solely on product attributes, and not on artificial duty-based cost considerations Lower end prices to customers to boost demand Majority of key customers of Reliance’s polyester and plastics have been with the company for a long time, indicating high degree of customer satisfaction and strong brand equity. Number of customers lost usually represents a fractional percentage figure in any given year for major products. For instance, in plastics, the PE and PP businesses did not lose even a single customer in , whereas in polyester, the PFY and PSF businesses together lost 11 existing customers. New customers continue to come to Reliance at an ever increasing pace - in , the number of direct polyester and plastics customers increased by 26% and 27% respectively. Majority of the top 100 consumers of plastics and polyester in India buy from Reliance - 100% of the top consumers of PE and PP bought from Reliance Similar numbers for PSF and PFY stand at 95% and 64% respectively. Excellent credit quality of customers is reflected in quick conversion of receivable into cash, and low working capital requirement. Franchise power provides substantial marketing leverage in home markets - clearly a long term competitive advantage and an effective entry barrier. Excise duty reduction on plastics has removed the cost advantage enjoyed by alternative packaging materials - demand likely to receive a major boost
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Foodgrains Packaging opened to Plastics
Foodgrains/sugar packaging in the country has been opened up to plastics, for the first time in decades Earlier, all foodgrains/sugar were to be packaged in jute bags, despite 100% cost penalty over PE/PP woven sacks Jute Packaging Material Act 1987 (JPMA) relaxed w.e.f. March 31, limit for foodgrains/sugar reduced from 100% to 90%, and urea from 20% to 15% Whole new markets opened up for PE/PP - significant increase in consumption Jute availability inadequate for growing foodgrains/sugar production - growth of 140 mn tonnes in last 10 years Majority of key customers of Reliance’s polyester and plastics have been with the company for a long time, indicating high degree of customer satisfaction and strong brand equity. Number of customers lost usually represents a fractional percentage figure in any given year for major products. For instance, in plastics, the PE and PP businesses did not lose even a single customer in , whereas in polyester, the PFY and PSF businesses together lost 11 existing customers. New customers continue to come to Reliance at an ever increasing pace - in , the number of direct polyester and plastics customers increased by 26% and 27% respectively. Majority of the top 100 consumers of plastics and polyester in India buy from Reliance - 100% of the top consumers of PE and PP bought from Reliance Similar numbers for PSF and PFY stand at 95% and 64% respectively. Excellent credit quality of customers is reflected in quick conversion of receivable into cash, and low working capital requirement. Franchise power provides substantial marketing leverage in home markets - clearly a long term competitive advantage and an effective entry barrier. A single new market for packaging of foodgrains/sugar has opened, unlocking vast demand potential for PE/PP
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Strong Potential for Demand Growth
Total demand in ‘000 tonnes/year PFY & PSF PP, PE, PVC India China World Chinese consumption at 3-4 times current Indian levels, indicates potential for sustained demand growth
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Business Review - Polyester
Domestic polyester demand growth at 7% per annum Reliance’s volumes increased faster, partly owing to acquisition of polyester capacity
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Business Review - Plastics
Domestic demand increased at 7% per annum RIL’s volumes increased industry growth
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Business Review - Oil and Gas
Oil and gas business now accounts for 2.4 % of revenues
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New Oil & Gas Initiative
RIL has been awarded a total of 14 offshore blocks under GOI’s New Exploration Licencing Policy (NELP) Deep and shallow water offshore blocks awarded on the basis of international competitive bidding RIL the No. 1 E&P player in the private sector in India RIL’s exploration acreage exceeds 1,00,000 sq. kms off the West and East coast of India RIL to invest approximately Rs. 200 crores ($ 50 million) per year over the next 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
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Significant Incentives - NELP
US$ denominated prices for oil and gas No signature, discovery or production bonus No mandatory state participation No cess on oil and/or gas Significantly lower royalties Freedom to market the oil & gas production in the domestic market No customs duty on the items imported for the project 100% cost recovery for the cost incurred 100% tax deduction for all expenditure (incl. capex)
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Moving up the Value Chain - Specialities
Speciality as %age of total volume Premium over commodity PE 5% 13% 26% 12% PP NA 17% 30% 13% POY Nil 10% 22% 14% PSF 9% 41% 45% 10% Majority of key customers of Reliance’s polyester and plastics have been with the company for a long time, indicating high degree of customer satisfaction and strong brand equity. Number of customers lost usually represents a fractional percentage figure in any given year for major products. For instance, in plastics, the PE and PP businesses did not lose even a single customer in , whereas in polyester, the PFY and PSF businesses together lost 11 existing customers. New customers continue to come to Reliance at an ever increasing pace - in , the number of direct polyester and plastics customers increased by 26% and 27% respectively. Majority of the top 100 consumers of plastics and polyester in India buy from Reliance - 100% of the top consumers of PE and PP bought from Reliance Similar numbers for PSF and PFY stand at 95% and 64% respectively. Excellent credit quality of customers is reflected in quick conversion of receivable into cash, and low working capital requirement. Franchise power provides substantial marketing leverage in home markets - clearly a long term competitive advantage and an effective entry barrier. Near doubling of speciality grades to differentiate RIL from commodity producers, enhance margins, enable expansion into new markets, and deliver superior overall value
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Tariffs - WTO Commitments
Current WTO Bound import tariffs Rates POY 20% 20% PSF 20% 20% PTA 20% 40% MEG 20% 40% PE 30% None PP 30% None PVC 30% 40% Import tariffs on POY, PSF have already reached WTO bound rates Tariffs on polymers likely to also gradually decline to 20% range in the next 3-5 years
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Strong Performance under Declining Tariffs
Strong performance in a declining import tariff environment: global competitiveness demonstrated
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Reliance Petroleum
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RPL - World’s Largest Grassroots Refinery
World’s largest grassroots 27 million tpa refinery completed ahead of schedule The No. 1 private sector player, with over 25% share in the domestic market, and maximum value addition The only Indian refinery capable of producing diesel with <0.05% sulphur and gasoline with <1% benzene 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
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Global Competitiveness and Outlook
Conservative funding of project cost of Rs. 14,250 crores ($ 3.4 bn) with debt:equity ratio of less than 0.9:1 Significant benefits from 30% - 50% lower per unit capital costs compared to large refineries commissioned in the region in recent times Based on full operating rates, RPL to achieve turnover of over Rs. 25,000 crores (US$ 5.7 bn) in FY 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)
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Power and Telecom
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Reliance Telecom - Update
Cellular services now available in 36 cities: current subscriber base of over 75,000 Average revenues per subscriber comparable to metro levels at Rs per month Subscriber base growing at over 100% per annum Reliance’s cellular services span 7 circles, 13 states, 1/3rd of India’s land mass and 1/3rd of India’s population Implementation of basic services in progress in Gujarat Reliance Telecom’s cellular operations EBITDA positive - unlocking of value through listing at appropriate time
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Reliance Power - Update
500 MW Jamnagar and 447 MW project Patalganga IPPs, to achieve financial closure in FY Commissioning in months from ‘Zero’ date RIL’s contribution unlikely to exceed Rs. 325 crores (US$ 75 million) per year over the next 3 years Jamnagar IPP to add value to bottom of the barrel output - petroleum coke, from the RPL refinery Attractive regulatory regime for IPPs ensures healthy profitability and offers a steady stream of income Reliance to leverage its core competence and strong presence in the energy-oil-petrochemicals chain
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Stock Buyback
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Objectives of Share Buyback
Return cash to shareholders in tax efficient, and investor friendly, manner - no sacrificing growth opportunities Manage stock price volatility, lower beta, and attract longer term investors Optimise Weighted Average Cost of Capital (WACC), thereby enhancing global competitiveness, and ROE 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
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Domestic Stock Price Performance
% change Period Date RIL Price Absolute Relative to Sensex Current 17 Apr Calendar YTD 31 Dec 1 year 17 Apr 2 year 17 Apr 3 year 17 Apr 5 year 17 Apr 10 year 17 Apr RIL stock price has consistently outperformed the Sensex over all time frames
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Returns to GDR/FCCB Investors
% change Issue Date Issue Current ($) Absolute Relative Price ($) Price to Sensex GDR 1 May GDR 2 Feb FCCB Nov 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
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RIL’s Declining Beta 2 1.3 1.1 Source : Morgan Stanley Consistent decline in RIL’s Beta reflects reduced volatility - reduction in weighted average cost of capital (WACC)
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Regulatory Framework Buyback can not exceed 25% of paid up capital and free reserves - approx. Rs. 3,000 crores for RIL Buyback in any financial year can not exceed 25% of the equity of Rs. 1,053 crores - approx. 26 crore shares Shares bought back have to be cancelled, and cannot be held as Treasury stock for re-issue 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
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Highlights of RIL Buyback Proposal
Maximum amount not exceeding Rs. 1,100 crores (US $ 250 million) - largest ever share buyback in India Maximum buyback price of Rs. 303 per share represents 22% premium to average of one-year trading price range Also represents 52% premium to recent low of Rs on March14, 2000, less than 20 trading sessions ago 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
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Highlights of RIL Buyback Proposal
RIL will adopt the transparent “open market purchases” methodology for the buyback, with full disclosures There will be no negotiated deals, spot transactions, or any private arrangements Promoters will not offer their shares under the buyback programme 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
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No Equity Offering for 2 Years
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 RIL has not made an equity offering for almost 6 years - in all RIL would not have issued equity for 8-9 years During this period, RIL has increased capacities to nearly 10 million tpa, maintaining its debt:equity below 1:1 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
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Exponential Growth - No Equity Offering
RIL has achieved exponential growth in the past 6 years without any fresh equity offerings
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Value Creation through Buyback
Completion of RIL’s buyback programme at upto Rs. 303 per share will lead to, at the minimum : 2.3% rise in EPS for FY Higher EPS growth of 36.4% (against current estimates of 33.4%) in next 12 months 70 basis points expansion in ROE to 22.9% in FY 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
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Positive Signals to Shareholders
Buyback proposal is intended to send out clear signals to RIL investors RIL will reward shareholders by returning cash to them High growth to continue Lower stock price volatility 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
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Summary
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Summary Stability returning to the overall petrochemicals price environment with recent drop in crude prices Improving outlook for global and regional petrochemicals industry - positive demand momentum coupled with a more disciplined approach to capacity creation RIL has implemented significant expansion in capacity close to the bottom of the cycle - net external sales up 54% this year RIL well positioned to participate in the industry upcycle with nearly 10 mn tpa capacity, global competitiveness and fully integrated operations Production volumes increased 33% to a record level of 5.27 million tonnes in the first nine months of This is despite the temporary dislocation in feedstock supplies at the Hazira petrochemicals complex in October 1998. Total production volume slated to touch nearly 7 million tonnes for the full year - final production volume for the year likely to be 20% higher than beginning of the year estimates. Sales revenues were up 11% at Rs billion (US$ 2.6 billion) in the first nine months. This comprised of the impact of volume growth at 23%, partially offset, to the extent of 12%, by the decline in average product selling prices. Reliance sold 95% of its production within India. Value added export opportunities selectively pursued with export revenues increasing 145% to Rs billion (US $ 121 million). Exports focussed on quality conscious markets of US and Europe, in recognition of the superior quality of Reliance’s products. Expansion in petrochemicals margins will lead to significantly higher returns for RIL
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Summary RIL is generating a ROCE (Return on Capital Employed) of 22% on its operating businesses 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 Future cash flows will be used in accordance with the capital allocation framework enunciated by the company 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
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Reliance Industries Limited India’s World Class Corporation
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