Somebody’s Wrong on Reliance
Shareholders in Reliance Industries haven’t had it this good for a long time. After years of under-performance, the Indian oil refiner’s stock has zoomed 21 percent since the end of September, versus a 6 percent drop in the benchmark Sensex. Chairman Mukesh Ambani’s net worth has swelled to $21.7 billion. And now, its latest quarterly earnings have shown that cheap crude is lubricating margins even more than analysts had expected.
Yet the bond market doesn’t seem to have got the merry memo. Those who purchased the company’s 2025 notes at the start of last quarter have made a 0.6 percent return to date. The cost of insuring Reliance’s debt against nonpayment using credit-default swaps, meanwhile, touched 219.4 basis points in early October, the highest since February 2014, and remains a rather elevated 184.7 basis points. This despite the company announcing a $2.2 billion rights issue, which will improve its debt-to-equity score.
It seems bondholders can’t bring themselves to be as enthusiastic about Ambani’s return to the telecom industry after a decade. Stock holders are reacting to the company’s aggressive $15 billion investment in fourth-generation wireless as if it were already a runaway success — never mind that the Reliance Jio service is yet to be commercially launched. The former are looking at the same money-guzzling 4G venture and wondering if it will work. Who’s right? Tuesday’s third-quarter earnings report offers some clues.
Start with refining, which is what’s spewing out the cash to pay both debt and equity investors. Operating income from refining almost doubled from the same period of 2014 to $985 million, or about 67 percent of the total. The company’s exploration business, of which great things were expected when Reliance struck gas off India’s southeastern coast some 10 years ago, is already a dog. Just 2 percent of the conglomerate’s revenue last quarter came from producing oil and gas. Reliance Retail, the company’s optimistic bet on India’s emerging middle class, is more than three times as big by sales but barely contributes anything to profit. So the question is, will Reliance’s $11.50-a-barrel refining margin, the highest in seven years, hold?
It might. Sanford Bernstein expects another $2-a-barrel boost from a coke de-gasification plant that’s on track for completion this year. Plus, there aren’t many new refineries in the pipeline. Australia’s refining industry is shrinking and China doesn’t intend to boost capacity either, according to Bloomberg Intelligence.
RELIANCE INDUSTRIES’ DEBT