Recent news reports of Reliance Industries (RIL) seeking to raise money are puzzling. Especially the quantum - in excess of Rs15,000 crs ($3bn). The report points out that Crisil, the rating agency that rates these bonds, has justified a AAA rating because it claims that RIL has Rs22,600crs of net cash accrual. - 44% of the net debt of RIL, and an interest cover of 22.
The petrochem cycle is currently down, as are the refining margins that RIL must be making. However, to require such a massive raising of capital indicates a financial requirement far in excess of what the known capex of the company indicates.
Other reports are telling : The Central Government has withdrawn its affidavit in the case of RIL-RNRL, which will now allow a settlement to proceed between the two companies. The Oil ministry is contemplating a move to float the market price of petrol and diesel - a laudable objective in general, but completely counter-trend in pre-election behaviour. Incidentally, both these moves will be beneficial to RIL - which is reflected in the recent share price upmove.
So what explains the capital raising? Given the sharp fall in crude price over the past couple of months, inventory losses may be a possible explanation. However, normal operations will not result in losses to require the scale of capital raising. Possible scenarios are (a) the scale of inventory losses are huge - suggesting speculative trading (b) the cost of development of the KG basin has suddenly gone up - which is either great news (more gas has been found), or terrible news (the project cost has inexplicably gone up), (c) the retail plans of RIL have been put on the fast track
Take your pick.
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