What analysts make of Mukesh Ambani's ambitious plans

Reliance Industries will spend more than Rs 1.5 lakh crore across its businesses over three years, chairman Mukesh Ambani said on Thursday, giving few details of plans for its long-anticipated launch of 4G telecommunications services.

But the focus of the 39th AGM of RIL was more on petchem side of the business where it is eyeing to become one of the top five petchem producers in the world, says SP Tulsian, who closely tracks the oil & gas major. "They are doubling the capacity of Paraxylene at Jamnagar which itself is very encouraging," he told CNBC-TV18 in an interview. However, for Tulsian the surprising part was investment of Rs 1.5 lakh crore in next three years. "The company continues to remain debt-free on a net basis. Does it mean that we are talking of the cash accrual of the company of Rs 150,000 crore in next three years, which is now at about Rs 25,000 crore?," he questions. In FY13, he says, the company had a net cash profit of Rs 25,000 crore, which can legitimately get deployed for this new expansion. "So, are we looking for that kind of cash accrual in next three years which itself is looking quite ambitious?" he wonders. Reliance, India's fourth-largest company by market value, has been under pressure from investors worried by its slowing natural gas business and its drive into consumer sectors such as telecoms and retail. Shares in Reliance were closed the day down 1.03 percent at Rs 792.30. The stock was about 0.5 percent lower before Ambani began his speech. Interestingly, energy sector expert Narendra Taneja points out Ambani spent good amount of time explaining about exploration and production (E&P) and the amount of investments RIL plans to make into the business, including shale gas. "In the industry, for the last couple of years, there have been all kinds of whispers; people have been saying Reliance has started losing interest in E&P business. However, the message he (Mukesh Ambani) has given now to the shareholders, as well as beyond the annual general meeting (AGM), is that on the contrary Reliance is actually going to focus even more on E&P business by consolidating and focusing on certain other countries," he says. Essentially Ambani tried to put to rest some of the disappointments that the stock had in terms of the E&P drag, says Prakash Diwan, Altamount Capital Management. "If you want to buy into the stock at Rs 800 area, a 25 percent appreciation in the next 12 months comfortably could be seen," he says. Catch full interview transcript on next page Also read: Mukesh Ambani's speech at Reliance Inds 39th AGM: Full Text _PAGEBREAK_ Below is the verbatim transcript of their interview on CNBC-TV18 Q: Some expansions were announced in the petchem from 15 million tonne to 25 million tonnes as well in polyester. The first half of next year, we are going to see 1 million tonnes of Purified Terephthalic Acid (PTA) coming and another 1 million tonne perhaps by end FY15, Paraxylene expansion as well and even in the ethylene cracker area. Does any of this sound new to you? Tulsian: In the whole speech, the five or six business verticals of the company, the focus has been more on petchem where they have said that they are eyeing to become one of the top five petchem producers in the world and they are doubling the capacity of Paraxylene at Jamnagar which itself is very encouraging. They will also be starting their petchem plant at Silvassa with the eventual capacity going up from 15 million tonnes to 25 million tonnes. Secondly, the eyes were on the telecom launch. He has not given any roadmap, but the things have been defined and that will happen in this year. He said next year things will be reviewed by him and they are looking for aggressive launch. What is really surprising is they are looking for an investment of Rs 1.5 lakh crore in next three years and the company continues to remain debt-free on a net basis. Does it mean that we are talking of the cash accrual of the company of Rs 150,000 crore in next three years which is now at about Rs 25,000 crore? In FY13, the company had a net cash profit of Rs 25,000 crore which can legitimately get deployed for this new expansion. So, are we looking for that kind of cash accrual in next three years which itself is looking quite ambitious? Secondly, he has been very cautious on the upstream business because he said that the oil and gas business across the globe is not very encouraging, though the core business has been seeing good improvement in the margin. The best part is that all the expansions that are likely to get completed or will start getting implemented from next one year and will get eventually completed in next 36 months will also coincide with the economic recovery on a global scale. So, these are the broad features. In retail there has again been disappointment. We all know that the top-line of Rs 10,000 crore and cash breakeven has been achieved which we got to know when the company announced their results and the target of Rs 40,000-50,000 crore of top-line in retail with 50 percent expansion every year can get achieved in next four to five years. This is because if you start compounding the top-line of Rs 10,000 crore with 50 percent growth every year, you will achieve Rs 40,000-50,000 crore in next four to five years. So this is the overall gist of the speech in which the focus has been more on the petchem. Coming on the gas production, the shale gas definitely is improving but conversely there has been fall in the domestic gas production as well. So, one can look for 8 mmscmd of shale gas production with total production of the gas by the company to be at about 26-27 mmscmd. So this is the broad gist of the speech. Q: There is ofcourse the MJ1-well discovery, as well as the two coal based methane blocks, anything in the oil and gas space that was important from the speech itself that you gleaned? Taneja: Yes, if you look at it for instance Mukesh Ambani has actually spent good amount of time explaining about exploration and production (E&P) and the amount of energy and investments they plan to make into the E&P business including ofcourse including shale gas. In the industry for instance the last couple of years there have been kind of whispers; people have been saying that look Reliance has started losing interest in E&P business. They have faced with the government; they have faced difficultly in terms of the reservoir of D6 etc, so the result was they were losing interest and they are going to probably focus more on the refining and petrochemical business only. However, the message he has given now to the shareholders as well as beyond ofcourse the annual general meeting (AGM) is that on the contrary Reliance is actually going to focus even more on E&P business by consolidating and focusing on certain other countries. At the same time he has said that amount of investment they are going to probably make more in shale gas in North America, maybe even in Canada if one could read between the lines. I think this is a significant message as far as the E&P business of the company is concerned. Secondly, there was a very significant message for the petrochemical sector and also the refining sector. For refining, as you know the refining scene globally is hotting up, with China coming up, seven more refineries and new refineries coming up even in Africa, Middle East and also in Latin America. So in a way they are saying that we know the business and we are going to enter into special arrangements with countries such as Venezuela and maybe in future with Iraq and other countries in order to source. Therefore, sourcing is going to be the main player as far as the Reliance’s strategy for refining is concerned, so that they can maintain impressive world-class refining margin. Thirdly, I think amount of time that Mukesh Ambani spent talking about the digital India, the new India in terms of the digital transformation, between the lines there was a massive massage there that Reliance is looking forward 2020 and beyond. A company, which is largely going to be energy plus digital that is the kind of Reliance 2020 and beyond. Q: How would you trade the stock now? What is your key takeaway from the speech? Diwan: Clearly, we are in for an equity raising programme, which Reliance should be getting under. It is going to be for the telecom business. It is a part of the Smart Transformation at Reliance (STAR), which they had announced last time for strategic transformation. Their body language was very confident that the business will continue to grow. So essentially he (Mukesh Ambani) is trying to put to rest some of the disappointments that the stock had in terms of the E&P drag. The year 2014 is still sometime away for the gas revision to happen. The stock should remain rangebound. The telecom venture could add significant trigger from hereon. So, a 25 percent upside in the next 12-months can be achieved if one buys Reliance at Rs 800 area. Q: Petchem disappointed the street last quarter. This time around he has given definitive targets about the completion of the capacity expansion in petchem, based on that do you expect significant improvement in the petchem business for Reliance Industries? Tulsian: I am quite hopeful on the petchem business. I won’t be disappointed with the margins. Maybe sequentially you may find that to be so, but if you take a longer time horizon, even the last quarter petchem margin has been good and the best part is the gradual expansion in the petchem segments with Silvassa plant going on stream now with the capacity addition of the paraxylene, ethylene cracker capacities also getting increased. So, all these things will start flowing into the company’s top-line and bottom-line maybe in a gradual manner starting from FY14 itself. FY14 may get to see that in Q4. So, I am keeping my positive stance. I have been deriving more comfort from the petchem segments, which seem to be front-ended while all other segments whether you talk of the telecom, exploration, retail they are all back-ended. I don’t think that anything will get contributed by those segments in the next couple of years. Q: Mukesh Ambani has promised some aggressive launches on the 4G end for telecom. How would you read his comments for the other telecom incumbents like Bharti Airtel, Idea or in general for the telecom industry? Diwan: One of the reasons why most of the times he has been very discreet on the 4G details is the competitive angle. Even now; the fact that they are trebling their team strength in terms of the telecom footprint, vendors appointed, everything is ready to go. It is just that they want to get into the market at a time when they do not give much time for the competition to react and respond to it. So they are very clearly looking at a skimming strategy for the 4G segment and they should be highly successful in that. He said, next year when I come, I am going to talk about operational details. 12 months is only going to be good enough for operational details to be discussed if the launches are aggressive enough. So the competition has been a watch out on this front.