BIG PLANS

Reliance Petroleum?s new refinery at Jamnagar has several positives going for it ? its parentage, Reliance?s proven project management skills, its location in an SEZ and the complexity of its refinery, which will lead to higher refining margins, are all points in its favour. Shares have been privately placed with institutional investors at Rs 60 each, with a lock-in period of one year. The price band of Rs 57-62 per share seems to be fine.

But production tests will start only from December 2008. And although HSBC predicts the company to make a profit of a billion dollars by 2010 with gross refining margins of over $10 a barrel, there are many risks. As the prospectus points out, the refining industry is cyclical, new capacities may come up and refining margins may change. China, for example, plans to increase its refining capacity by one-third by 2010. Saudi Arabia is planning a $8-billion refinery at Yanbu.

Since Reliance Industries will hold 80 per cent of Reliance Petroleum?s post-issue share capital and since it has bought this share very cheaply at an average price of Rs 23 per share (Rs 270 crore shares at Rs 10 each and 90 crore shares at Rs 62 each), anybody who wants an exposure to Reliance Petroleum may prefer to take it via Reliance Industries.

Fourth-quarter results

The fourth quarter results, which will start coming in soon, are the next hurdle that the markets have to cross. This market is priced at more than perfection, and any disappointment could lead to a sell-off. With the sensex price-earnings ratio based on trailing earnings at over 20 it's the most expensive market in Asia outside Japan and priced more steeply than the Dow Industrials, which has a PE of around 17.6. A rule of thumb says that a PE to earnings growth ratio of 1 is fair value, which implies that earnings growth for the sensex companies should average 20 per cent in the fourth quarter.

That?s unlikely to happen, and most analysts expect sensex earnings growth of around 15 to 16 per cent. But analysts have also made a series of upgrades to their forecasts of financial year ?07 earnings because of several favourable factors, the impact of which should be seen in the fourth quarter results.

Strong rural demand is expected to buoy the fast moving consumer goods sector, which has also been blessed by the return of pricing power. The investment and housing boom will continue to boost the construction sector. The cement industry will profit from rising prices and volume growth, while additions to capacity have been held in check. Economic growth has also had an impact on freight rates, which have also gone up after the Supreme Court?s directive on overloading of trucks. Commercial vehicle manufacturers will benefit. The metals sector too is expected to do better than in the third quarter, with higher aluminium, copper and zinc prices, while even steel prices are on the mend. Analysts believe that oil companies too may improve on their third-quarter results, chiefly because of the oil bonds that they have been allotted, although refining margins have shrunk.

IT companies will have to contend with a 2 per cent appreciation in the value of the rupee during the quarter, which may impact revenues and margins. Banks have had a rough quarter because interest rates have climbed during the quarter, which will lead to higher depreciation on their portfolios and increase funding costs for many of them. Special sectors like sugar should post fabulous results. Pharma companies catering to the domestic market will do well because of the adverse impact of the introduction of VAT in the comparable quarter of financial year 05.