gem worth investing - RELIANCE PETROLEUM


Apart from the promoter company, Reliance Industries, Reliance Petroleum also offers a good investment opportunity as its 29 million metric tonne per annum (580,000 barrels per day) refinery, the world's sixth-largest is likely to come on stream before the scheduled December 2008.

The commissioning of capacity is well timed, given that the outlook for gross refining margins (GRMs) is bullish till FY12.

Globally, refining margins are likely to remain buoyant between $5-$10 per barrel from 2008 to 2012, thanks to the huge demand-supply mismatch and the time lag of three to four years for new capacities to come on-stream.

Also, increasingly stringent environmental standards leading to demand for light and cleaner products, and thus, high prices are further strengthening the case for higher GRMs.

The company's promoter, Reliance Industries' gross refining margins improved by 380 basis points in nine months ended December 2007 to $14.9 a barrel, almost double of the benchmark Singapore complex margins of $7.7 a barrel. Since RPL will be able to process even complex crudes it will earn relatively high refining margins.

The key thing to look in this case is the movement of the rupee against the dollar, which is bullish, though it would be partly offset by low cost incurred by the company due to its plant location in a special economic zone, benefiting from incentives like zero duty on imports of plant and machinery and fiscal benefits like a tax holiday (no minimum alternative tax; 100 per cent for first five year followed by half that for another five years).

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