BUY
Market price : Rs 45
Market Cap : Rs234bn
52week H/L : 70/42
Average Vol : 2851120nos

Putting up a buy recommendation in the current turbulent markets requires a lot of courage. Especially when you see your investment value see dwindle every day. Even though, the market crash has been spearheaded by ICE stocks, even the old economy stocks had to bear the brunt of it (to lesser extent though). "When it rains every body gets wet" so goes the saying. However we think that the current situation offers a great opportunity to buy some great stocks at bargain prices. Reliance Petroleum is one such stock. We feel that the stock has many triggers that makes the stock a good buy at current prices.

• Not long ago the stock was going great guns with talks of Reliance Industries, (the promoter of RPL) making announcement that it was planning to sell 10% of its stake to FIIs & Strategic oil companies. The placement with global oil companies is expected to bring many strategic benefits to Reliance. A tie up with global oil majors like Kuwait Petroleum or Shell would be of immense help to RPL in area of crude procurement. This is because although the government has allowed private players to hedge their oil requirements, hedging of oil is an art that requires at least 10 –15 years of experience. A $1 saving in crude oil price can help RPL save close to $200mn. The recent turmoil in the markets has meant that the process may be delayed. We nonetheless feel that the delay should not be for more than a couple of months.

• "Private sector players should to be allowed to set up retail outlets for petrol and diesel before actual dismantling of the administered pricing mechanism for petroleum products from April 2002". This is the key recommendation of the Naresh Narad committee on Regulation of Marketing of Controlled Petroleum Products set by the government to draw road map for oil marketing through dismantling of APM by April 2002.

The committee has recommended that private sector companies on the condition of investing or proposing to invest Rs20bn in activities of exploration and production, refining, pipelines or terminals may be authorized to market transportation fuels. The recommendations of committee are likely to be tabled before the Cabinet by the month-end for final decision when it is most likely to be cleared.

Now what does it mean for Reliance petroleum? It means that the oil monolith gets an instant license to set retail outlets to market diesel and petrol, the most lucrative area in the oil industry. And though the margins will be government controlled till FY 2002, it would definitely give RPL a head start over other players as none of the other domestic or global oil major are in a position to utilize this opportunity as much as RPL.

• The government plans to sell its 36% stake as well as management control in IBP. The process is to be wrapped up in the next six months. IBP with around 1500 retail outlets and 4.55 market share spread all over India gives a very good entry vehicle to anybody planning to enter oil marketing. RPL continues to be a strong contender for IBP. Though it has to be seen in light of the fact that oil marketing being a very lucrative area every one including oil majors like Shell, Caltex, BP etc among a host of others are making a bid for IBP.

• RPL is world’s largest greenfield refinery complex with an installed capacity of 27mtpa. The company’s highly complex secondary processing facilities optimize product pattern and provide higher distillate yield. Economies of scale coupled with superior refinery configuration would help the company post better refining margins than its competitors. The company has the lowest per million ton capital cost of Rs5.18bn, which is 40-60% lower than that of other refineries set up in the Asian region. The refinery can process even the cheapest and hence the worst variety of crude oil. Its infrastructure facilities and integration with Reliance Industries enable it to save on freight costs.

• For the first nine months, RPL recorded sales of Rs234bn and net profit of Rs11.67bn, making it the biggest private corporate in terms of revenue. RPL achieved 101% capacity utilization in the last two quarters, unique for a new company and compares favorably with global utilization figures. The company has also emerged as India’s largest manufacturer exporter with exports of Rs47bn in the first nine months.

• The company supplies 5 controlled products to Oil PSUs while the other products are marketed directly. As it is not linked to the oil pool mechanism, it does not face the delay in collecting payments. RPL has the evacuation infrastructure in place with port jetties and loading terminals. Moreover, it is investing heavily in the various pipeline networks coming up in the country. It has a 13% stake in the Vadinar- Kandla pipeline and 26% in Central India Pipeline.

The current price of Rs45 discounts its nine month annualized EPS of Rs3 by 15 times. Although this may look a bit expensive as compared to other oil companies one has look into the fact that RPL enjoys some inherent advantages and thus deserves a premium discounting. We feel that the company is worth a buy at the current price of Rs45.

Team 5 Paisa

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