Jamnagar and D6 gas crucial for Reliance cash flow

Vol 12, PW 14 (27 Nov 08) People & Policy

Reliance Industries might soon have to cut back spending because of the global credit crunch.

Some reckon it’s already happening. CRISIL, a respected Indian credit ratings agency, notes that cash flows from two of Reliance’s delayed showcase projects, D6 gas and the second 27m t/y Jamnagar refinery, are badly needed to sustain the company’s enviable credit rating.

CRISIL said on November 21 in its Reliance rating outlook that the company’s financial flexibility and the risk of its massive investments hinge on “strong cash accruals expected in the E&P business from early next year.â€‌ Until the cash starts flowing, however, Reliance will be forced to approach the markets for more debt.

Days after CRISIL issued its impressive "AAA/Stable" rating on Rs100bn ($2bn) of Reliance non-convertible debentures, the Mumbai-based conglomerate was reported to be seeking up to $1bn in new loans from life insurance, mutual and pension funds, as well as banks, to fund ongoing operations. Reliance is India’s largest company by market capitalisation and finances most projects, like the Jamnagar refinery and D6, through a mix of equity, debt and outside partners.

But it now seems the refinery won’t come on stream until April next year. Worse, returns from the new refinery will initially be poor because of lower refining margins globally.

CRISIL believes that other new Reliance businesses, such as its grocery store chain, Reliance Fresh, the promotion of Special Economic Zones and a home goods chain, Reliance Home, will drain valuable cash and “prevent any significant improvements in (Reliance’s) capital structure in the near term.â€‌ When D6 gas flows, the position will ease, but cash from India’s biggest discovery in living memory is already late by two months because of a court case between brothers Mukesh and Anil Ambani.

No one knows when it will start flowing to shore.

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