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RIL counts expansion gains

Mumbai, Aug. 31: Reliance Industries Ltd expects to save at least $1.5 billion in costs annually over the next two years as it looks to reap the benefits of its expansion plans in refining and petrochemicals.

Analysts maintain that the huge capex and other cost optimisation efforts by RIL till 2016-17 will push up its EBITDA (earnings before interest, taxes, depreciation, and amortisation) — a key measure of a company’s profitability.

The company is expected to save around $500 million alone by importing 1.5 million tonnes (mt) of ethane from North America. The Mukesh D. Ambani-flagship had recently announced that it would import ethane to feed its gas crackers in the country. The feedstock will substitute propane (which is also imported) and naphtha.

“Given depressed US ethane prices and rising production, we estimate an annual savings of $450 million from this feedstock substitution from 2017-18,’’ Vikas Kumar Jain, analyst at CLSA, said.

According to Jain, the landed cost of ethane will work out to around $9 per million British thermal units (mBtu) compared with the current propane and naphtha prices ranging between $16 per mBtu and $19 per mBtu.

RIL will invest Rs 180,000 crore over the next three years in its various businesses. At its annual general meeting in June, chairman Ambani had indicated that the impact of these programmes would start getting reflected in the company’s numbers from 2016-17.

In its refining business, RIL is implementing a $4-billion coke gasification project in Jamnagar, converting low-value petroleum coke from the refinery into useable fuel (gas), which will lower energy costs.

According to a note from IIFL, the capex undertaken by RIL in the refining segment should result in lowering the operating cost of the refinery by $1 billion from 2016-17. The brokerage said besides cost savings, the company’s efforts in this regard could push up its margins by nearly 200 basis points and add at least $3 billion to its EBITDA.

The RIL stock has underperformed at a time the key indices are running at record levels. Market circles blame this on its oil and gas business that has seen lower production (from the KG-D6 block) and the government’s delay in announcing a hike in natural gas prices. The block is producing just around 13 million metric standard cubic meters per day (mmscmd) of gas against a peak of 66.35mmscmd.

While the Sensex has risen 26 per cent so far this calendar year, the RIL share has risen by a little over 12 per cent. Analysts maintain that RIL is likely to take serious efforts in pushing up its gas production only after issues such as the new gas price are sorted out.

 
 
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