RIL eyes new sectors

In recent times, RIL’s oil & gas business has been facing major headwinds on account of its failure to match the projected gas output in the country’s biggest gas field. The govt. decided to initiate punitive action to limit the amount of expenditure the oil & gas major is allowed to recoup from its flagging KG-D6 gas field.

To recapitualate the sequence of events, RIL had initially made investments of around US$ 5.8 billion in exploration, and set up facilities to handle 80 mmcmd of gas production. In reality, the fields ended up producing less than 42 mmcmd. According to the Production Sharing Contract (PSC), the operator (in this case, RIL) is allowed to recover 100% of its exploration and production costs, which does not link cost recovery to its output. However, the ministry now wants to disallow the expenditure incurred in constructing production/processing facilities in the KG-D6 block that are currently under-utilised or have excess capacity because of falling output.

As per media reports, the government has now gone on to refuse recognising 6 discoveries in its D6 block saying that the claims were not backed by prescribed tests. This has dealt a blow to the company’s plan to boost sagging production by developing new fields in the block. As a result, the scrip has lost over 2.9% on the bourses today, and is currently seen trading at Rs 772. On a YTD basis, India’s largest company by market capitalisation has yielded negative 26% returns, as against negative 20% by the benchmark Sensex.

However, all this negativity surrounding its oil & gas business hasn’t stopped the heavyweight from foraying into other business ventures, to explore the opportunities presented therein. Come 2012, the company has chalked out an extensive plan to enter the financial, telecom and education sectors.

With an eye set on becoming a premier financial services provider, the company’s JV with US financial services giant D E Shaw, named D E Shaw India Financial Services, is slated to start operations in January 2012. It seems that all the blue prints are on the table, ­ right from acquisitions to launching mutual funds to running for a banking license. According to news reports, the JV has already bought over a dormant financial services company, and has received clearances from various sector regulators, including the SEBI and NSDL.

In case of telecom, last year RIL picked up a 95% stake in Infotel Broadband for its pan-India broadband wireless spectrum license, signalling a foray into the telecom sector. Infotel was the only company to have won a national broadband license in 22 circles for Rs 12848 cr, in a government-run auction for running 4th gen. telecom services. According to sources, the company has readied a Rs 15000 cr odd war-chest, and is looking at leasing out more than 50000 towers. Though it is in the very initial stages of discussion, it is believed that RIL is in talks with many leading players in the country, and has already started the process of selecting vendors to source telecom equipment.

A few weeks ago, Infotel Broadband also picked up a 38.5% stake in digital educational company Extramarks Education, hinting at a foray into the emerging education sector. The acquisition of the stake in Extramarks is expected to strengthen Infotel’s content portfolio, and help grow its business, which will benefit RIL in turn.

The company has a blueprint to invest Rs 500 cr in the sector for the next 3 years, which will leverage RIL’s broadband foray. The interest in digital education also stems from the fact that RIL is expected to launch its broadband wireless services, beginning the 2nd half of next year. One must not forget that that the promoter group, the Mukesh Ambani family, already have an investment in the education sector through the prestigious international school they have set up in Mumbai.

RIL has also made small strides into the hospitality business by picking up a 14.12% stake in East India Hotels (EIH), which runs the prestigious Oberoi chain of hotels. Recently, Mukesh Ambani’s wife, Nita Ambani, was also inducted into the EIH board, along with RIL old-timer Manish Modi.

However, with no clarity on the extent of the troubles to be faced in the oil & gas business and a high gestation period for its future business forays, we believe that RIL would continue to under-perform the bourses for quite some time ahead.