RIL’s bond risk lowest since June as gas price to rise 90%

 

New Delhi: Bond risk for billionaire Mukesh Ambani’s Reliance Industries Ltd (RIL) fell to the lowest since June on optimism it will gain from a 90% jump in natural gas prices and pro-business policies of India’s next government.

Contracts protecting the energy company’s debt against non-payment for five years have dropped 112 basis points from a 14-month high in September to 190, according to data provider CMA. Credit-default swaps for Malaysia’s Petroliam Nasional Bhd (Petronas) slid 41 basis points. India’s move to market-determined gas pricing from 1 April will boost RIL’s net income 17% to Rs.25,700 crore in 12 months, according to analyst estimates compiled by Bloomberg.

RIL shares soared to the highest since November and the benchmark stock index reached a record last week as opinion polls suggested the main opposition party Bharatiya Janata Party (BJP)-led by Gujarat state chief minister Narendra Modi will oust the ruling Congress-led coalition in elections to be held from April to May. Higher gas prices and positive investor sentiment towards India favour Ambani, who is among businessmen that have praised Modi, as he seeks to fund a $25 billion expansion plan.

“The new gas price is the biggest trigger for RIL,” Jagannadham Thunuguntla, chief strategist at SMC Global Securities Ltd in New Delhi, said in a 20 March interview. “The market at an all-time high and the anticipated election outcome are adding to that.”

Bond yields

The yield on Reliance’s 5.875% perpetual bond issued in January 2013 has dropped 130 basis points, or 1.3 percentage point, from a record 8% in September, according to Standard Chartered Plc prices. That compares with a 170 basis- point drop in state-run Oil and Natural Gas Corp. Ltd (ONGC)’s 3.75% notes due May 2023. Each dollar increase in gas prices will raise ONGC’s annual revenue by Rs.4,000 crore, chairman D.K. Sarraf said this month.

Mumbai-based RIL, India’s second-largest company by market value, earns almost all its profit from sales of gas from its fields as well as fuels and chemicals produced at the world’s biggest refinery complex located in Gujarat. The energy explorer also sells products from vegetables to television sets through its retail stores, owns a stake in a hotel chain and plans to start a fourth-generation telecommunications business this year.

Gas production at its KG-D6 block in the Bay of Bengal has slumped for three consecutive years as RIL said the rocks under the sea were more difficult to produce from than it anticipated. The company’s shares have declined 39% from an all-time high in December 2007.

Stock performance

The stock has surged 11% in March and is headed for its biggest monthly increase since January 2012. The benchmark Sensex index has gained 3% this month, while India’s rupee has advanced 1.4% to 60.93 per dollar and the yield on benchmark 10-year government bonds has fallen seven basis points to 8.8%, data compiled by Bloomberg show.

“The gas field has been the biggest cause of pessimism around RIL,” Abhishek Agarwal, a Mumbai-based analyst at Macquarie Bank Ltd, said in a 10 February report. The gas-price increase will boost output more than four times by 2019 as smaller discoveries become viable, he wrote.

Too expensive

“The price revision, the first in four years, may make the fuel too expensive for use in power production,” N.N. Misra, operations director at state-run NTPC Ltd, the nation’s biggest generator, said in February. “The increase will also raise costs for use in homes and for producing fertilizers, fueling Asia’s highest consumer-price inflation.”

India’s oil ministry has ordered RIL to furnish a bank guarantee, which will be cashed by the government if it is proved that the company deliberately reduced output at the field, oil minister Veerappa Moily said in December. The ministry in May also disallowed the recovery of some exploration costs related to the field after production dropped.

Ambani has been criticized by Arvind Kejriwal, who’s Aam Aadmi Party ruled Delhi for 49 days following its rise from an anti-graft campaign. The AAP in February filed a police complaint against Ambani, RIL and oil minister Moily for creating an artificial gas shortage and Kejriwal wrote to the Election Commission on 20 March asking it to stop the gas price increase, according to a statement by the group.

Moily has denied charges of favouring RIL and on 23 February said the decision to raise prices was taken by the Cabinet.

Reliance statements

Tushar Pania, a Mumbai-based spokesman at RIL, didn’t reply to an email seeking comments. In a 11 February statement, the company called Kejriwal’s allegations completely baseless and lacking any merit or substance. In a 20 March video message to investors, RIL spokesman Umesh Upadhyay said the company hasn’t received any undue benefits from the Gujarat government.

“The market is ignoring this opposition,” said P. Phani Sekhar, a fund manager at Angel Broking Ltd in Mumbai. “There’s increased clarity that either the Congress or the BJP will form the next government, and neither opposes increasing gas prices.”

Opinion polls by Nielsen and the Centre for the Study of Developing Societies predict Modi’s BJP will win the most seats, while falling short of a majority in the lower house of parliament. The Congress party is projected to achieve its smallest-ever number of seats.

‘Very important’

“It’s very important for the government to push forward with the pricing reforms,” said Lutz Roehmeyer, who helps manage $1 billion, including Indian assets, as a director at Landesbank Berlin Investment. “Taking the short-term impact of consumers dissatisfaction and higher inflation is a price you have to pay, but the price is a one-off effect and fruits of this reform will stay forever.”

Local gas prices will rise to as much as $8 per million British thermal units starting 1 April from $4.2 now,” India’s then oil secretary Vivek Rae said on 12 January. RIL may increase its pre-tax profit by as much as 7% higher prices, Standard and Poor’s said in a 14 January report.

“The explorers will profit a lot and their shareholders and debtholders will be very happy,” Roehmeyer said. “The market is demanding a change and a move toward a free market is very important.” Bloomberg

 

RANJAY KUMAR,

PGDM 2nd SEM,

SOURCE-: MINT