Reliance Petroleum, RPL, is entered into the capital market on April 13 with a public issue of 135 crore equity shares of Rs 10 each for cash at a premium to be decided through 100% book building route.
The issue was made to part finance the Rs 27,000 crore (Rs 270 billion) export-oriented refinery being set up in a special economic zone, SEZ, at Jam agar, Gujarat. The export-oriented refinery will have a capacity to process 5,80,000 barrels per day making it the sixth largest refinery in the world. As a part of this project, RPL is also setting up a 900,000 tonne per annum polypropylene plant. The project is likely to go on stream by December 2008. The book running lead managers are Citigroup Global Markets India, Deutsche Equities India Private, DSP Merrill Lynch, Enam Financial Consultants Private, HSBC Securities & Capital Markets (India) Private, ICICI Securities, JM Morgan Stanley Private, SBI Capital Markets, UBS Securities India Private and Karvy Computer share Private is the registrar to the issue. RPL was incorporated on October 25, 2005, and as such has yet to complete a year of operations. Since the project is slated to be completed only by December 2008, revenues would flow in only from FY09.
Work on the project has already started, with more than Rs 20 billion invested and orders worth Rs 150 billion already placed for long lead items. Although the refinery is slated to start commercial production by December 2008, yet, considering RIL’s execution capabilities, positive surprises are likely.
STRATEGIC ADVANTAGES HIGHLIGHTS -
Best of world crude oil has already been tapped and newer ones are high dense with high sulphur which needs special refinery and RPL is few among the one.
Most of refineries are set to process high quality only.
Norms of emissions are now becoming strict (US, EUROPE) and existing refineries are inflexible to meet this norms. Demand could outstrip refining capacities and existing refineries unable to process so called dirty crude may have to be shut down.
Heavy (dirty crude) is cheaper than light crude around 5 dollar/barrel and RPL can capitalize on it. This leads to gross refining margin go up with the ability to produce superior products from cheaper crude.Some of other refineries that plan to expand also will complete their project only on 2011.RPL will be one of the 5% with ability to process heavier crude in the world. But capital cost for a high tech refining set up is higher than older method by 4 dollar/barrel/day. But RPL has managed itself to set up in SEZ, which has tax-redemption on exports 100% for 5 years and later 50% for next 5 years. Duty free import of crude oil and capital equipments because of SEZ. Technology, knowledge, marketing expertise of RIL can be shared with RPL and hence synergy between both.
Chevron ’s stance unclear — RIL ’s partial stake sale in RPL raises question marks on Chevron ’s intentions;we think any move by Chevron to sell their 5%stake back to RIL could pave the way for RPL ’s eventual merger with RIL. Upside risks to our target price could come from:i)any move to increase RPL ’ s capacity further,and ii)increased differential of clean fuels (50/10ppm sulphur).
Valuation -
Valuation methodology uses a traditional EV/EBITDA multiple as on September-08 applied on 12-mnth forward EBITDA i.e.2HFY09E plus 1HFY10E.In addition,we value the tax benefits separately which is added to the core value to arrive at the target price.We believe EV/EBITDA is an appropriate valuation metric as it eliminates variations due to capital structure and taxation,thus facilitating peer comparison. We believe that RPL,with its level of complexity (which we believe accord sustainability to margins)warrants a valuation at the higher end of peers i.e.,a12-month forward EV/EBITDA of 7.5x.We have upgraded the multiple from7.0x earlier due to RIL ’s ability to source challenged crude grades and sustain the differential over Singapore Complex even during periods of soft crack spreads.Based on our GRM assumptions and the highly remunerative tax regime,we value the tax benefits to be worth NPV of US$3.3bn (Rs30/share).
This together with core value based on 12-mnth forward EV/EBITDA multiple
(Rs190/share)is the basis of new target of Rs220/share.
The issue was made to part finance the Rs 27,000 crore (Rs 270 billion) export-oriented refinery being set up in a special economic zone, SEZ, at Jam agar, Gujarat. The export-oriented refinery will have a capacity to process 5,80,000 barrels per day making it the sixth largest refinery in the world. As a part of this project, RPL is also setting up a 900,000 tonne per annum polypropylene plant. The project is likely to go on stream by December 2008. The book running lead managers are Citigroup Global Markets India, Deutsche Equities India Private, DSP Merrill Lynch, Enam Financial Consultants Private, HSBC Securities & Capital Markets (India) Private, ICICI Securities, JM Morgan Stanley Private, SBI Capital Markets, UBS Securities India Private and Karvy Computer share Private is the registrar to the issue. RPL was incorporated on October 25, 2005, and as such has yet to complete a year of operations. Since the project is slated to be completed only by December 2008, revenues would flow in only from FY09.
Work on the project has already started, with more than Rs 20 billion invested and orders worth Rs 150 billion already placed for long lead items. Although the refinery is slated to start commercial production by December 2008, yet, considering RIL’s execution capabilities, positive surprises are likely.
STRATEGIC ADVANTAGES HIGHLIGHTS -
Best of world crude oil has already been tapped and newer ones are high dense with high sulphur which needs special refinery and RPL is few among the one.
Most of refineries are set to process high quality only.
Norms of emissions are now becoming strict (US, EUROPE) and existing refineries are inflexible to meet this norms. Demand could outstrip refining capacities and existing refineries unable to process so called dirty crude may have to be shut down.
Heavy (dirty crude) is cheaper than light crude around 5 dollar/barrel and RPL can capitalize on it. This leads to gross refining margin go up with the ability to produce superior products from cheaper crude.Some of other refineries that plan to expand also will complete their project only on 2011.RPL will be one of the 5% with ability to process heavier crude in the world. But capital cost for a high tech refining set up is higher than older method by 4 dollar/barrel/day. But RPL has managed itself to set up in SEZ, which has tax-redemption on exports 100% for 5 years and later 50% for next 5 years. Duty free import of crude oil and capital equipments because of SEZ. Technology, knowledge, marketing expertise of RIL can be shared with RPL and hence synergy between both.
Chevron ’s stance unclear — RIL ’s partial stake sale in RPL raises question marks on Chevron ’s intentions;we think any move by Chevron to sell their 5%stake back to RIL could pave the way for RPL ’s eventual merger with RIL. Upside risks to our target price could come from:i)any move to increase RPL ’ s capacity further,and ii)increased differential of clean fuels (50/10ppm sulphur).
Valuation -
Valuation methodology uses a traditional EV/EBITDA multiple as on September-08 applied on 12-mnth forward EBITDA i.e.2HFY09E plus 1HFY10E.In addition,we value the tax benefits separately which is added to the core value to arrive at the target price.We believe EV/EBITDA is an appropriate valuation metric as it eliminates variations due to capital structure and taxation,thus facilitating peer comparison. We believe that RPL,with its level of complexity (which we believe accord sustainability to margins)warrants a valuation at the higher end of peers i.e.,a12-month forward EV/EBITDA of 7.5x.We have upgraded the multiple from7.0x earlier due to RIL ’s ability to source challenged crude grades and sustain the differential over Singapore Complex even during periods of soft crack spreads.Based on our GRM assumptions and the highly remunerative tax regime,we value the tax benefits to be worth NPV of US$3.3bn (Rs30/share).
This together with core value based on 12-mnth forward EV/EBITDA multiple
(Rs190/share)is the basis of new target of Rs220/share.
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