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| RIL’s Ambani: Drawing
a new gameplan |
The Ambanis'
penchant for size and scale is legendary, and is reflected in the
capacities they've put up (refining and petrochemicals) and projects
they've rolled out (telecom and the Rs 25,000 crore retailing blueprint
that's being implemented). At a time when observers back home are
still in awe of the mega-acquisitions pulled off by the Tatas and
the Birlas (of Corus and Novelis, respectively), Mukesh Ambani,
Chairman, Reliance Industries (RIL), at the time of BT going to
press, appeared poised to conclude the mother of all mega-deals:
With the $49 billion (Rs 2,15,600 crore) Dow Chemicals of the us,
which could be either a joint venture or an outright acquisition.
At the same time, he threatens to queer the pitch for India's organised
retailers by not just partnering with a global giant in this business
but by buying into its operations. For good measure, too, Ambani
is said to be keen to acquire stakes in projects of Chevron, the
US energy colossus that bought into Reliance Petroleum in 2006.
But it's the Dow transaction that promises to be the blockbuster.
A recent report put out by Citigroup places the value of Dow's
commodity portfolio at $21.56 billion (Rs 94,864 crore), without
taking into consideration the control premium factor. Assuming
a 15 per cent premium, Citi's analysts think Ambani would have
to pay up $24.8 billion (Rs 1,09,120 crore) for Dow, lock, stock
and barrel. That would easily make it the largest buyout by an
Indian company-Tata Steel currently holds that honour with its
$12.1-billion purchase of Corus. Even if Reliance opts for the
joint venture route, the transaction could still well be the largest
ever. According to Citi, a "60 per cent ownership in the
JV by the acquirer would result in a pre-tax valuation of roughly
$15 billion." At a value of $21.56 billion, Dow's chemical
business has an enterprise/earnings before interest, taxes, depreciation
& amortisation multiple of seven.
Apart from the attractive valuation, RIL will get instant access
to global, developed markets, apart from technology. "The
options for RIL domestically are fairly limited and, to that extent,
going overseas is logical," points out V.K. Sharma, Director
& Head of Research, Anagram Stockbroking. For the Michigan-headquartered
Dow, the option of shifting its manufacturing from high-cost locations
in the us and Europe to India cannot be discounted. Overall, Dow's
product portfolio includes performance plastics, performance chemicals,
agricultural sciences, basic plastics and basic chemicals. In
2006, Dow registered a top line of $49.1 billion and a net income
of $3.7 billion. Dow is also the world's second-largest chemicals
manufacturer, after BASF, with a presence in 150 countries. "RIL
will benefit from Dow's global customer base, advanced technology
and established bases in the world's developed markets,"
says Citigroup's report. RIL's spokesperson, when contacted, declined
to comment.
The big move by the flagship comes at a time when Ambani is
said to be considering a rather audacious purchase of ownership
in a big global retailer, with the names of UK supermarket group
J. Sainsbury and Carrefour of France doing the rounds. Media reports
have suggested that Reliance would acquire a 13 per cent stake
in Carrefour from the Halley family, its largest shareholder.
As if all this weren't enough, it is also learnt that Reliance
is looking to acquire stakes in Chevron's projects spread across
the world. The route that Reliance will adopt will be through
alliances, partnerships and acquisitions. Chevron has the option
of increasing its stake in Reliance Petroleum to 29 per cent and
the current development may be a way to strengthen the relationship
between the two partners for other projects as well. Whilst you
have to wonder whether an enthusiastic media should take the credit
for the revelation of these various gargantuan global ambitions
or whether it should be attributed to the proverbial and ever-permeable
'sources', fact is that just an acquisition of Dow Chemicals will
be adequate to propel an already global giant (albeit not yet
geographically) into an elite club of global corporations.
Power
Play
North to bear the brunt for lower
tariffs in Maharashtra.
It's been over two years
since the government began its efforts to revive the beleaguered
2,184 mw Enron-promoted Dabhol power project (now rechristened Ratnagiri
Gas & Power). The task continues. The latest move, on March
9: pooling the fuel cost of the Ratnagiri project with that sold
to other consumers that purchase LNG sourced from Petronet LNG (PLL).
The objective is to keep the tariff under Rs 3 per unit, else the
key buyer, the Maharashtra state, would refuse to buy power from
this plant. This, however, comes at a cost; existing consumers,
over 150 of them, will pay a higher tariff for the gas they purchase
from PLL. These include Maruti Udyog, fertiliser companies in the
public sector (IFFCO) and the private sector (the K.K. Birla-owned
Chambal Fertilisers) and small-scale units (glass industries, ceramic
units) in North India.
While the existing consumers have little choice-the cost of
alternative fuel (naphtha, fuel oil) is close to thrice the price
that they currently pay-fact remains that they will pay for the
sins of the Maharashtra government as well as those of the Centre
in contracting power from the erstwhile Dabhol project in the
first place.
Through the pooling mechanism, consumers in Maharashtra gain
a considerable bit. Fuel accounts for close to 60 per cent of
power tariff and while the market price of LNG is close to $9
per mmbtu, translating into a tariff of around Rs 3.60 per unit,
the pooled cost of $5.83 per mmbtu will ensure that the tariff
will be around Rs 2.70 per unit. But for private sector consumers
like Maruti, whose current payout is in the region of $5 per mmbtu,
the fuel bill will rise by over 10 per cent. For fertiliser units,
the increase in the fuel bill will mean little given that the
costs are reimbursed by the government under the retention pricing
scheme, in effect increasing the fertiliser subsidy bill. The
worst hit, however, will be small scale units like glass and ceramic
units, where gas consumption accounts for as much as 80 per cent
of the operating expenditure.
-Balaji Chandramouli
Conversion Gambit
A promoter has issued warrants to restore
faith in IPOs.
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| Dabhol plant: High tariff |
You need to be a brave promoter
to consider an initial public offering (IPO) in a market that appears
to have lost its appetite for new offerings. After all, since January,
18 of the 26 companies that tapped the primary markets are trading
below their issue price. You need to be even braver if you're a
promoter preparing to take your realty company public. Stocks like
Akruti Nirman and C&C Construction, which got listed in February,
are trading way below their offer price.
Another option for IPO-hungry promoters is to be innovative-like
Orbit Corporation, a real estate developer, which is raising up
to Rs 106.5 crore by issuing convertible warrants with equity
shares, a first in the history of Indian primary markets. Merchant
bankers point out that such a structure is a bid to restore confidence
of investors in real estate IPOs. The warrants issued can be converted
into shares 18-30 months after the stock is listed. If the six-month
average stock price trades below the offer price, investors can
convert the warrants at a 30 per cent discount to the stock price.
If the six-month average price is above the offer price, investors
can bag the shares at a 10 per cent discount after conversion.
At the time of writing, the Orbit issue was set to open in a
price band of Rs 108-117 per share. Price-earnings multiples are
not relevant because they're at an absurd level-of 4,320-4,680
for the year ended March 2006 (the company showed net profits
of Rs 9.2 lakh for that year). However, what gives the pricing
respectability is Prudential ICICI Mutual Fund's 3.45 per cent
buyout of Orbit's equity at Rs 90 per share last year.
-Mahesh Nayak
Free Market for FIIs
Are they deserting India for Vietnam? Not
really.
These days Paritosh Thakore,
Head of Asian Equities, ABN Amro Bank, is besieged by institutional
investors urging him to flag off a Vietnam-dedicated fund. It isn't
as if these investors are staking out the globe for socialist republics
(although the Communist Party of Vietnam was progressive in launching
free-market reforms way back in the mid-80s). If investors want
a piece of the action in Vietnam equities, it's simply because it's
so far the best performing market in 2007, with a 54 per cent gain
till date. "Investors have become demanding. They want to invest
in developing markets that will create value," says Thakore.
Along with Vietnam, investor interest has also surged in markets
like China, Malaysia, Sri Lanka and the Philippines-in the 75 days
till mid-March, Pakistan has gained 14 per cent, China 11 per cent,
Malaysia 9 per cent, and the Philippines and Turkey 7 per cent.
India, in contrast, has been the worst performer amongst emerging
markets, with the Sensex losing 6 per cent in this period. Brazil
and Russia are other two emerging markets in the red, down 4 per
cent and 5 per cent, respectively.
If Vietnam, which recently became a WTO member, has become the
flavour of the season, it's because investors view it as a stable
proxy to China-economic growth has been consistently high (averaging
7.8 per cent over six years) and political stability isn't an
issue.
What's also attracting investors is the fact that markets like
Vietnam have been neglected for long, and hence undervalued. Also,
as K. Ramachandran, Senior Vice President & Head Advisory
Desk, BNP Paribas, points out: "Barring China, all these
other markets are relatively small; hence a not-too-large flow
of funds can have a huge impact on these markets." Although
Vietnam is an outperforming market (but still not an Asian top
six, and hence not listed in the table above), market men estimate
its FII inflows in 2007 at comfortably under a billion dollars.
India, despite recent outflows, has attracted $1.13 billion so
far. Says Ajay Bagga, CEO, Lotus AMC: "Vietnam is in the
take-off stage which is why we are seeing interest from select
institutional players. However, a few million dollars of inflows
in countries like Vietnam will not impact flows into India. The
third-largest market in Asia, which received 49 per cent of total
FII inflows last year, will continue to attract investments as
long as (earnings) performance continues to impress." However,
what could impact all these markets-India included-is a us slowdown.
Says Markus Rosgen, Managing Director-Equity Strategy Regional
Head, Asia Pacific Equity Research, Citigroup: "A slowdown
in the us will hit all the export-led economies in Asia, so India
may not be adversely impacted. However, all markets in this region
will suffer as investors will get risk-averse and pull out their
investments from this part of the globe."
-Mahesh Nayak
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