Is the worst really over for RIL?

Mon, 11 Jun Pre-Open

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India's largest private sector company, Reliance Industries Ltd (RIL) has recently concluded its 38th annual general meeting (AGM). Addressing the meeting Mr Mukesh Ambani, Chairman of the company, charted out the company's future growth strategy through different diversifications. He stated that the company would invest Rs 1 trillion (1 lakh crore) in the next five years to double its operating profit from a more diversified operation.

The core business of the company, oil & gas segment has been not performing well for several reasons. The company's gas output has already fallen to 35 million metric standard cubic metres a day (mmscmd). Natural gas output from its KG-D6 block has halved. Due to this, the company has to suffer monetary penalty as well. The company plans to raise gas output level to 60 mmscmd in the next 3-4 years. All this does not paint a very bright future for the company as far as its oil & gas business segment is concerned. In addition, many analysts doubt the success of the company's investment plan in the new ventures such as retail business , telecom operations and financial services.

Now several big questions arise. Would RIL be able to arrest the fall in its oil & gas business? Would the company be able to do well in its other planned investments?

First of all, the company's disputes with the Indian government over several issues such as gas pricing, claim for capex and gas reserve in KG-D6 block are far from over. To ramp up the production level, the company would need several government and regulatory approvals. Considering the tough stance of the government after the regime change in the oil ministry, the task would be anything but easy. As regards the success in the other new ventures, it is definitely not a bad idea to invest in the consumer focused themes in India. However, all this would take several years to generate significant profits for the company.

No doubt, the RIL chairman showed tremendous confidence in the diversification strategy for the future growth. To appease the concerns, he even tried to touch the emotional cord of the shareholders by saying "if we had listened to sceptics, we would still be a textile company". True, the company's growth strategy projects a promising picture from a long term perspective. However, the company's short term pains may continue to prevail.