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Reliance Industries Limited First Half Results 1999 - 2000 October 20, 1999

Reliance Industries Limited First Half Results 1999 - 2000 October 20, 1999. Index. Macro Economic Environment Operating Environment Financial Performance Business Review Shareholder Value Enhancement Summary. Macroeconomic Environment. Improved GDP Outlook for Asia.

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Reliance Industries Limited First Half Results 1999 - 2000 October 20, 1999

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  1. Reliance Industries Limited First Half Results 1999 - 2000 October 20, 1999

  2. Index Macro Economic Environment Operating Environment Financial Performance Business Review Shareholder Value Enhancement Summary

  3. Macroeconomic Environment

  4. Improved GDP Outlook for Asia GDP Growth Rates (%) 1998 1999 (E) 2000 (E) Japan -2.8 1.4 1.7 China 7.8 7.0 8.2 Hong Kong -5.1 1.0 3.5 South Korea -5.8 8.1 6.0 Singapore 0.3 6.3 5.0 Thailand -9.4 5.0 4.1 Indonesia -14.5 0.1 5.1 India 6.0 6.5 6.5 Source: Research Reports The Asian economic recovery is well underway - GDP growth in the region may average 5% in the year 2000

  5. Stable Regional Currency Environment % change over Currency 3 months 6 months 1 year Yen 12.8 11.9 8.9 Korean Won -1.4 -0.1 10.2 Singapore $ 1.9 1.9 -2.8 Thai Baht -5.1 -4.8 -2.7 Indonesian Rupiah -15.5 8.4 -1.4 Indian Rupee -0.4 -1.2 -2.4 The relative stability in regional currencies is indicative of the improvement in the overall business climate

  6. Performance of Regional Stock Markets Country % change YTD (US$) Japan 37 China 33 Hongkong 25 South Korea 38 Singapore 41 Thailand (3) Indonesia 40 India 57 The general improvement in economic prospects is also reflected in buoyant stock market trends

  7. Trends in Crude Prices Crude prices have moved up sharply - 88% year-on-year

  8. Economic Recovery in India • GDP growth estimates revised to 6 - 6.5% • Industrial production growth increased to 6.3% in August 1999 from 5.9% in July 1999 • Growth in manufacturing sector at 6.1% in August 1999; electricity sector up 11% • Inflation rate remains at historic lows - WPI at 1.8% • Revival in transportation sector - medium and heavy commercial vehicles production up 63% in H1 1999-00 • Cement production up 21% and steel 7% A broad-based economic recovery is underway in India

  9. Operating Environment

  10. International Price Trends - Feedstocks The strong uptrend in crude prices has driven key petrochemicals feedstocks higher

  11. International Price Trends - Polyester The average prices for PSF/POY in the first half have been lower than corresponding year ago figures

  12. Domestic Price Trends - Polyester Domestic polyester prices have tracked international trends

  13. International Price Trends - Plastics A significant recovery has been witnessed in plastics prices

  14. Domestic Price Trends - Plastics The average plastics selling prices in the first half have been 15%-20% higher than corresponding year ago figures

  15. Factors Contributing to Price Recovery • Stronger than anticipated recovery in regional economies and continued growth in the US and Euroland • A sharp rise in crude prices - driving product prices higher, throughout the petrochemicals chain • Destocking phase over last year - inventories at normal to low levels • Y2K concerns a short term demand factor • Restocking by processors • Commissioning delays in some ongoing projects - Formosa Phase II, Petronas/Union Carbide Petrochemicals prices have been driven up by a combination of cost push and demand pull factors

  16. Outlook for Prices and Margins • Indications are that the bottom of the petrochemicals cycle may be behind us • Demand supply balance improving - no visible capacity growth beyond the year 2001 - several major projects in the region cancelled • Stronger yen and restructuring in Japan’s petrochemicals industry to lead to further rationalisation in the supply side • Eventual weakening in crude oil prices can lead to improvement in margins • RIL’s strategy of selling 10%-15% below landed cost of imports - cushion against any reduction in import duties The global petrochemicals cycle may be turning sooner than was earlier anticipated

  17. Domestic Demand Supply Position • POY/PSF currently balanced: • strong demand growth • no new capacities announced - other than RIL • rationalisation by RIL leading to more competitive industry structure • Fears of PE/PP surplus unfounded: • Non RIL projects running behind schedule • New capacities facing technical and quality problems - unable to achieve high operating rates • New capacities subject to export obligations - reduced availability for domestic markets • RIL producing speciality grades not offered by other producers The concerns over a possible domestic surplus in plastics do not take into consideration the ground realities

  18. Financial Performance

  19. Performance Highlights • Reliance continues to lead the Indian private sector with highest sales, profits, assets, and net worth • Record production level of 3.91 million tonnes in the first half - increase of 13% • 400,000 tpa of PP and 930,000 tpa PX commissioned at Jamnagar - balance plants will be commissioned ahead of schedule in the current financial year • Prices of petrochemical products as well as feedstocks have moved up sharply over the last few months • Recent price trends indicate firmness in the short term

  20. Financial Highlights Sales Rs. 8,673 crores (US $1,989 mn) Operating Profit Rs.1,713 crores (US $ 393 mn) Net Interest Cost Rs. 144 crores (US $ 33 mn) Cash Profit Rs. 1,569 crores (US $ 360 mn) Net Profit Rs. 1,122 crores (US $ 257 mn) Annualised CEPS Rs. 33.2 (US $ 0.76) Annualised EPS Rs. 23.6 (US $ 0.54) First private sector company to report net profit of over Rs. 1,100 crores in six months

  21. Income Statement First private sector company to report net profit of over Rs. 1,100 crores in six months

  22. US GAAP/ IAS Reconciliation The major difference is primarily on account of higher deferred taxation, arising from imposition of surcharge on corporate tax

  23. Business Mix Reliance remains focussed on the petrochemicals business

  24. Growth in Production and Sales • Sales revenue growth of 18%, contributed by: • Impact of sales volume growth 13% • Impact of increase in avg. product prices 5% • Robust growth in domestic demand - over 95% of production sold within India • Value added export opportunities captured - Exports at Rs. 421 crores (US $ 97 mn) Production volume increased 13% to a record level of 3.91 million tonnes - on course to achieve forecast production level of 8 - 8.5 million tonnes for the full year

  25. Enhanced Operating Margins Operating margins increased to 19.8% in H1 99-00. This was the result of : • strong volume growth • higher product prices mitigating increased feedstock costs • continued focus on efficiency, productivity and costs • rationalisation of customs duty All plants operated at rated capacity during the period

  26. Profitability Ratios Increased OPM, Improved NPM and RONW Annualised Cash EPS of Rs. 33.2 is discounted 7 times at current price

  27. Liquidity Ratios Conservative liquidity ratios reflect RIL’s financial strength

  28. Conservative Financial Management • Reliance is the only Indian company having international ratings constrained by the sovereign ceiling • Net gearing of 35% reflects conservative policies • Net Debt: Cash Flow ratio of 1.6 indicates the company’s ability to retire its entire debt in less than 2 years • Forex exposure on account of international borrowings of $ 1.3 billion fully hedged by dollar assets • Annual Forex debt service outflow of about $ 110 mn. adequately covered by export revenues alone • Increasing export revenues provide additional hedge

  29. Exports To Rise Significantly • Exports revenues up 47% to Rs. 421 crores ($ 97 mn) • Export revenues will increase about 200% to $ 400-500 mn (around Rs. 2,000 crores) p.a. by the year 2000-01 • RIL’s imports of feedstocks will drop with the commissioning of the Jamnagar complex • RIL to have substantial net foreign exchange earnings by 2000-01 Reliance to emerge amongst the largest manufacturer exporters from the country

  30. Y2K Compliance • All mission critical systems have been made Y2K capable • Remediation of some non-critical systems will extend in last quarter of 1999, due to plant scheduling and equipment lead times • Contingency plans in place to control any risk arising out of year 2000 problems • Y2K costs unlikely to have any significant impact on financial position or results of operations • All major customers, international suppliers, and banks are already Y2K compliant Y2K issues are not expected to pose any material risk to RIL’s operations

  31. Business Review

  32. Business Review - Polyester • RIL emerges as the 5th largest PFY producer in the world • The full impact of the Raymond Synthetics’ capacity of 74,000 tpa to be reflected in the next year

  33. Business Review - Polymers • Polymers demand grew 14% in the first half • The full impact of the 60% increase in RIL’s plastics capacity will come through in the second half

  34. Business Review - Oil and Gas • Strong growth in production volumes - gas production up sharply from 5.7 to 7.6 mm cu. metres per day • Positive impact of higher oil and gas prices

  35. Leading Market Shares RIL maintains its market leadership through its nationwide marketing and distribution network, product development activities and strong customer relationships

  36. Demand Growth Potential - Polyester Polyester* Consumption Total (mn tpa) Per capita (kgs) India 1106 1.1 China 3755 3.0 US 2203 7.8 World 15268 2.5 *Data for PFY and PSF China consumes about 3 times as much polyester as India - indicating strong potential for continuing demand growth

  37. Demand Growth Potential - Plastics Plastics* Consumption Total (mn tpa) Per capita (kgs) India 2308 2.4 China 11785 9.6 US 19487 72.2 World 77012 13.2 *Data for PE,PP, and PVC Strong domestic demand growth likely to continue with China consuming nearly 4 times as much plastics as India

  38. Robust Growth in Domestic Demand Historic Future growth CARG Estimates Growth Drivers (last 5 yrs) (per annum) Polyester 14% 10%-15% - lower prices (PFY, PSF, PET) - substitution of cotton Fibre Intermed. 17% 10%-15% - growth in polyester PTA, MEG) demand Plastics 12% 12%-15% - JPMA implementation (PE, PP, PVC) - edible oil packaging - Substitution of traditional materials like metals, wood, glass - Convenience, presentation

  39. RIL’s Acquisition Strategy • Growth over the past 2 decades has been achieved mainly through the organic route • Future growth to be driven by a mix of acquisition and fresh capacity creation • The global petrochemicals industry is undergoing a consolidation phase in pursuit of scale, focus and efficiencies - Dow/Union Carbide, Equistar, Montell • The domestic industry too will need to restructure in order to ensure competitiveness • Reliance will participate in acquisition opportunities to increase business competitiveness and enhance shareholder value

  40. Rationalising Indian Polyester Industry • RIL has acquired control of 140,000 tpa of polyester capacity in 3 separate deals over the last 2 years • Achieved improvement in market share, diversification of manufacturing base, and increase in overall integration • RIL’s acquisition strategy is focused at maintaining market leadership in a regional excess supply context • Reliance to leverage its technical skills, financial strength, nation wide network, customer relationships, and access to key inputs, in creating value through acquisitions • Reliance working towards a more competitive industry structure by leveraging its strengths to acquire capacities

  41. Capital Allocation Framework

  42. Capital Allocation Framework • RIL will allocate upto 50% of its internal accruals over the next 3 years for capacity expansion/ debottlenecking • Reliance will also pursue other avenues for deployment of its cash flows such as: • acquisition opportunities in its business areas • debt reduction • enhanced distributions to shareholders, through appropriate dividend and stock buyback policies (subject to an appropriate regulatory framework) RIL is committed to deployment of its future cash flows in a manner that maximises shareholder value

  43. Capital Allocation Framework • Profit growth and capital productivity will receive due emphasis • Reliance’s profit oriented growth strategy will: • enable it to achieve significantly higher rates of return on capital • require a level of investment that is significantly lower than current capacity replacement costs • strengthen its overall cost and competitive position • enhance its overall market leadership • improve its product mix, customer satisfaction and customer reach

  44. Capex Plans for next 3 Years • RIL will spend Rs. 1,000 crores per year on expansion and de-bottlenecking programmes over the next 3 years • This is well below the indicated level of 50% of expected internal cash accruals • Additional capacities to be implemented at around 50% of the current replacement cost of comparable assets • This will ensure lower capital intensity and substantially higher returns • Detailed feasibility studies currently being conducted RIL will implement necessary capex plans to maintain and enhance its leadership in growing markets

  45. Polyester Business • Reliance intends to double its polyester capacity, with the focus on PFY • Reliance aims to be amongst the top 3 polyester producers in the world • Reliance aims to be the lowest cost, and the most competitive, polyester producer in the world • Demand growth for polyester continues to be in double digits - PFY demand alone is increasing by 100,000 TPA • Reliance will correspondingly increase capacity of its existing PTA plants to maintain the level of integration RIL’s polyester capacity will cross 1 million TPA over the next 3 years

  46. Polymers Business • Reliance intends to de-bottleneck its existing multi-feed naphtha cracker from 750,000 tpa to nearly 1 million tpa of ethylene • Simultaneous de-bottlenecking of downstream capacities to achieve higher production of polymers and other cracker products • Domestic polymer consumption has been increasing at compounded double-digit growth rates The debottlenecking of the cracker will be achieved at marginal capital costs

  47. Shareholder Value Enhancement

  48. Key Value Drivers • Capex programme at Jamnagar nearing completion • Continuing strong growth in overall volumes • Upside from any further recovery in the petrochemicals cycle • Improvement in capital efficiency and productivity • Capital allocation framework transparently laid down for the future Reliance is committed to enhancing shareholder value through appropriate business and financial strategies

  49. Unlocking Hidden Values • RIL’s 50% stake in RPL has a market value of Rs. 15,000 crores (US$ 3.5 billion) • 30% Participating interest in Panna, Mukta and Tapti oil and gas fields recently valued at Rs. 2,600 crores (US $ 600 mn) in Enron restructuring • RIL’s equity stakes in BSES and L&T have market value of Rs. 1000 crores (US $ 250 mn) • Cash balances of over Rs. 6000 crores (US $ 1.5 bn) - over Rs. 60 per RIL share • Replacement value of RIL’s manufacturing assets put at Rs. 40,000 crores (US $ 9 bn) - over Rs. 400 per RIL share • Total value of the above around Rs. 65,000 crs (nearly US $ 15 bn) - over Rs. 650 per RIL share Reliance will endeavour to take all necessary steps to unlock hidden values for enhancing shareholder value

  50. Creeping Acquisition of RIL Shares • The promoters have acquired around 20 million shares of RIL (2% of equity) from secondary markets • Purchase of shares in full compliance of SEBI guidelines for creeping acquisitions • Under SEBI guidelines, promoters have flexibility to buy additional 3% of equity (around 30 million shares) within the same 12 month period • Acquisition reflects promoters’ strong commitment to RIL, and their firm belief in under-valuation of shares The promoters have affirmed their commitment to enhance their shareholding in RIL, utilising the creeping provisions to the fullest extent

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