Corporate Front: Strategy [Can Shell's India Tack Fuel Growth?]

Although the company's diverse forays appear to lack focus, CEO Vikram Singh Mehta is merely replicating the oil major's global blueprint in India.

Fifteen minutes before trading ended on September 30, 1998, the Bombay Stock Exchange (BSE) received a formal communiqué that, finally, ended the years of speculation about the National Organics Chemicals Industries Ltd (NOCIL). The 2-page letter informed the BSE board about the proposed demerger of the Rs 1,100-crore NOCIL into 3 companies-and the $128.99-billion Royal Dutch/ Shell's (Shell) intention to purchase a 49 per cent stake in the petrochemicals entity. However, the announcement did not improve the sentiment about the NOCIL scrip: the share price fluctuated between Rs 33.20 and Rs 35.55; for all purposes, no different from the day before.

On the contrary, emotions ran high among the deal-makers, Arvind Mafatlal, the 75-year-old Chairman of the Rs 2,000-crore Mafatlal Group, and Vikram Singh Mehta, 45, the head of Shell's operations in India. ''Both nocil and Shell will gain by reforging their alliance,'' says Mafatlal. Adds an enthusiastic Mehta: ''Even when we withdrew from NOCIL (in 1992, Shell sold its 33.33 per cent stake in the company to the Mafatlals), we believed it was a good business to be in.''

V.S. Mehta, Head (Indian Operation), Shell

That is not in doubt since Shell's second coming has been an open secret for 2 years. Beliefs apart, the recent agreement with the Mafatlals also fits in with Shell's global, regional, and India strategy, which has been unveiled-albeit slowly-over the past 4 years. In India, the oil transnational's objectives have been two-pronged: one, to find users for the surplus Liquefied Natural Gas (LNG) and refinery-products available from its global operations. Of greater importance, however, is Shell's long-term plan: duplicate its global blueprint in the country by extending its tentacles to sectors such as oil and gas, power, and petrochemicals.

Within the next decade, Shell's Indian operations will, increasingly, reflect what the company pursues at a global level. Internationally, nearly 80 per cent of its turnover is contributed by the sale of oil-products while oil- and gas-exploration (including LNG sales) and petrochemicals equally contribute the rest (see graphics). Against that background, BT reveals what the world's sixth-largest company is flaring for the Indian market.

THE PETROCHEMICALS PLAN. Strangely, Shell's re-entry comes at a time when global prices are at a 30-year low. While the international price of High Density Poly Ethylene (HDPE) has fallen sharply from $990 per tonne to $550 per tonne in the past 16 months, domestic prices have witnessed a dip from Rs 55,000 per tonne to Rs 45,000 in the same period. But Mehta remains unperturbed. Says he: ''That does not bother us too much since this business is cyclical. Margins are down, but there is no reason why they should not improve.'' In any case, Shell's petrochem interests were always high.

In fact, it sold the NOCIL stake for Rs 114 crore only after failing to gain majority control. According to the new agreement, Shell-and its 100 per cent subsidiary, Montell-will pick up 49 per cent in the newly-formed petrochemicals company through a preferential issue priced at between Rs 29 and Rs 35 per share. The investment of between Rs 230 crore and Rs 250 crore will be for assets of Rs 600 crore and Rs 350 crore of debt. The Mafatlals, who will be left with a 21.50 per cent stake, may further dilute it to 11.50 per cent in the near future.

Mehta plans to invest Rs 4,500 crore to expand the cracker capacity from 75,000 tonnes per annum (tpa) to 4.50 lakh tpa in the first phase (2003), and then, to 6 lakh tpa by 2005. Post-expansion, the cracker will yield 4.50 lakh tonnes of ethylene, 2.50 lakh tonnes of propylene, and 2.10 lakh tonnes of a mix of benzene, toluene, and other xylenes every year. And despite the massive plans chalked by other competitors, like the Rs 13,500-crore Reliance Industries-which is increasing its polyethylene capacity at the Jamnagar complex in Gujarat from 3.57 lakh tpa to 7.57 lakh tpa-the prospects are good.

Agrees Suresh Iyer, 27, an analyst with the Mumbai-based broking firm, P.R. Subramanyam & Sons: ''Since India imports 20-25 per cent of its requirements, there is scope for another player.'' In 1997-98, India imported 1.35 lakh tonnes of HDPE and 1.15 lakh tonnes of Low Density Poly Ethylene. And imports are likely to continue since demand is expected to grow by an average of 14 per cent per annum.

THE REFINERY ROULETTE. Shell has worked hard to increase its presence in India since it formed a 51:49 joint venture with the Rs 12,055-crore Bharat Petroleum Corporation Ltd (BPCL) in 1994 to sells lubes. In late 1996, it signed an agreement with the Saudi Arabia-based company, Aramco, to set up an integrated oil company which would explore opportunities to set up refineries, oil and gas pipelines, and retail oil products in India.

In addition, Shell had a concrete plan to set up another refinery: a Rs 7,070-crore, 7-million tpa refinery at Loharga (near Allahabad) with BPCL. While the refinery project is on the backburner, Shell's agreement with Aramco has yielded no results either. The decision not to pursue the former was dictated by the fact that Shell's real interest lies in finding a potential market for the 6.56 million barrels of oil it produces every day from its global operations spread across 32 countries.

Mehta agrees that its refinery project has been shelved: ''Our interest in the BPCL refinery venture has waned since it depended largely on whether we could freely market the products. But our conditions were not realised, and the project was not viable.'' And when asked if he is interested in other refineries (with Aramco), Mehta only says: ''We are on the lookout for opportunities, but we don't have any concrete plans.'' Which is an indication that the venture may be shelved.

THE OIL & GAS STRATEGY. As part of its long-term objectives, Shell-through Shell India Production Development-is prospecting for oil (or gas) in Barmer (Rajasthan) after failing to strike oil in the Kerala-Konkan basin despite pumping in $29 million in 1992. But, to short-circuit the inevitable long wait, Shell has also expressed its willingness to participate in oil- recovery programmes in oil-fields like Neelam (Bombay High). The production at Neelam has come down to a third: from a peak of 3 million tonnes in 1995 to 1 million tonnes in 1997. The company is also interested in pursuing deep-water exploration.

However, its real objective in the short term is to scout for buyers for the excess gas being produced in the gas fields in Oman, Indonesia, and Australia. Since most of the proposed undersea pipelines did not take off, transnational oil companies have been forced to propagate the use of LNG. Shell has emerged as the biggest LNG player, with sales of 80 billion cubic feet of gas per day last year. In addition, the company has also entered the LNG transportation segment; at present, Shell runs a fleet of 80 oil-tankers and gas-carriers. The problem: Shell, whose gas reserves stood at over 20 trillion cubic feet on December 31, 1997, has set up LNG-producing beachheads in Brunei (6 million tpa), Malaysia (17 million tpa), and Australia (7 million tpa) while 2 new ones are planned in Oman (7 million tpa) and Nigeria (7 million tpa). And it is desperately scouting for new users.

As it turns out, India is one of the most- attractive user-markets for LNG. Which explains the urgency being displayed by oil transnationals, like the $20.27-billion Enron and the $6.06-billion Unocal, to sell LNG to domestic users and, simultaneously, set up LNG-based power- and fertiliser-projects in the country. Shell, which entered the power sector after it purchased a 50 per cent stake in InterGen last year, has similar plans. In fact, while the company's 4 power plants are under construction in the UK, Mexico, the Philippines, and Columbia, 9 other projects are ''under development.''

In India, Shell India, a fully-owned subsidiary, has been shortlisted for a 1,800-mw, Rs 6,500-crore gas-based power unit by the Tamil Nadu Industrial Development Corp. at Ennore. The power project is tied to the 2.50-million tpa LNG terminal at the same site. But Shell will have to compete with other global consortia, like Enron-Mitsubishi and Petronas-Tenaga-Petronet, for the project. Also on the anvil is a Rs 700-crore LNG unit at Hazira (Gujarat) in a joint venture with the Rs 3,300-crore Essar Group. And Essar Power (515 mw) and the Rs 2,486-crore Essar Steel will be the captive users for the LNG project.

To ensure success, Shell plans to buy a 49 per cent stake in Prime Hazira, a Mauritius-based company promoted by the Ruias, which has a 49 per cent stake in Essar Power. But that will depend on the speed with which it can get the clearances. His Indian Foreign Services background may help Mehta get greater access to the corridors of power. Indeed, the Chairman of Shell Transport & Trading Co., one of the holding companies in the group, Mark Moody Stuart, met the former prime minister, I.K. Gujral, in November, 1997, and, in April, 1998, briefed the Vajpayee Administration about the group's plans. At least in terms of intent, Shell is digging its way in anticipating an Indian oil-rush.

THE MAFATLAL GROUP'S MANOEUVRES

The Mafatlal Group has no time to celebrate its exit from the petrochemicals business. After all, Hrishikesh Mafatlal made up his mind to divorce NOCIL a couple of years ago, and concentrate on the group's remaining core businesses of textiles, chemicals, and finance. And while the innovative transfer of management control in NOCIL's petrochemicals division to Royal Dutch/Shell keeps alive the Mafatlal Group's interest in the business-through a 21.50 per cent stake in the company-it yields no funds for a group in financial dire straits.

Until the Mafatlal Group further dilutes its equity in the demerged petrochemicals business, the money will come in from the sale of NOCIL's Rs 176-crore rubber chemicals business. The Mafatlal Group's 42 per cent stake is likely to be picked up by the Rs 1,414-crore Apollo Tyres for between Rs 65 crore and Rs 80 crore. That leaves the group with the remnants of nocil, which consists of the Rs 62-crore plastic products business, and the investments of NOCIL, including holdings in De-NOCIL, an agro-chemicals based 50:50 joint venture with the Indianapolis-based $2.5-billion Dow Elanco.

While De-NOCIL has been growing, the same is not true about the plastics division, which manufactures processed polyethylenes and ethylene vinyl acetate-both high-volume, low-margin products. ''Positive growth is a big question-mark. I don't think there is any reason for the promoters to hold on to it,'' opines Suresh Iyer, 27, an analyst with P.R. Subramanyam & Sons. Well, there is a paucity of buyers. And that is worrying since the residual company also inherits a 14 per cent share of NOCIL's debt, which works out to Rs 71.54 crore.

There are greater worries at the group's flagship, Mafatlal Industries, which reported net profits of Rs 3.4 crore for the 18-months ended September, 1997 (results for last year have not yet been announced) by piggy-backing on an Other Income of Rs 226.74 crore. Says Arvind Mafatlal, 75: ''We will try to generate 70 per cent of the group's sales from textiles.'' Adds his son, Hrishikesh Mafatlal, 44, ceo, Arvind Mafatlal Group: ''We will gear up our strengths in the textiles business.'' That's easier said than done for the Mafatlals, who have, traditionally, let opportunities pass by in their core business.

Late in the day, Mafatlal Industries is trying to grow its own upmarket readymade brands-a formidable task that relies too heavily on its 300-strong retail shop network. Of course, much of its hopes rest on growing exports, which account for over 50 per cent of Mafatlal Industries' turnover. Here, the company is focusing on denim exports through its 50:50 joint venture with the $2.50-billion Burlington Industries, which will market its products. There's tough competition in the form of established heavyweights like Arvind Mills and K.G. Denim.

In fact, the only silver lining is Mafatlal Industries' Rs 250-crore chemicals business, which brings in 25 per cent of the profits. But Mafatlal Finance (1997 income: Rs 106 crore; net profits: Rs 3.48 crore) is a puzzling choice for a core business. It is doubtful if the cash-strapped group will have the resources or the inclination to take this automobile finance company into its stated areas of future interest: mutual funds and housing finance. As the Mafatlals get down to the arduous task of rebuilding their core empire, there are some distractions they can well do without.