Even granting that refining margins have been excellent in this period due to the strong oil prices, the fall in contribution from the petrochemicals business to earnings is certainly disturbing.

Profit margin (PBIT) in the petrochemicals business has dropped by half to five per cent in the fourth quarter compared to the previous year. It appears that there has been extreme pressure on volumes and the growth seen in the top-line is largely from increased price realisations. This is also borne out by the higher finished stock, both during the fourth quarter and for the fiscal. Of course, Reliance's focus on speciality premium grades that bring in higher realisations has shielded revenues but the fall in sales volumes is certainly a cause for worry as is the sudden drop in margins in the fourth quarter.

The company plans to have 1,500 retail outlets operational by the next one year for which it is pumping in Rs 3,000 crore. Not much is known about the locations of these outlets or their size, but Reliance says that each of its outlets would sell double the industry average.

While this will be one part of the puzzle, the larger one would be the logistical issue of moving products in large quantities over long distances. Reliance may have to rely on the network of the public sector oil companies in the initial period, negotiating which is going to be a tricky affair. Witness the decision of Indian Oil to convert the Kandla-Bhatinda product pipeline into a crude carrier aimed mainly at gaining an advantage over competition.

Of course, the picture could change dramatically for the better if Reliance succeeds in bagging one of the two marketing companies — Bharat Petroleum or Hindustan Petroleum — that are on the block.

But the flip side is that Reliance may be forced to shell out a considerable sum, especially in the case of Hindustan Petroleum given the impressive list of potential bidders that includes the likes of Shell, ChevronTexaco and BPAmoco. And, again, there is a lot of uncertainty over when exactly will the two deals go through.

The two key factors now are time and money and Reliance is up against a stiff challenge in both.

The Infocomm venture has a total capex budget of Rs 18,000 crore, half of which has been spent till now. As the recent difficulties with its retailing plans shows, the telecom business is complex and risky.

It is also entangled in a complex regulatory web now and not everything points to a smooth sailing for Reliance Infocomm.

The payoff from Reliance's investment in the venture could take a while to come, assuming that the business does take off right away.

Of particular concern is the fact that there could be increasing demands on Reliance for capital from the venture just in case the original plans do not work out as envisaged.

Of course, Reliance's strong cash generation (Rs 7,500 crore in 2002-03) will take up a part of the burden but the major share has to come from borrowings with the associated strain on the balance-sheet in the medium-term.

Besides, there is also tremendous uncertainty over the pricing of gas at the moment with the first parcel of LNG from Petronet expected to hit Indian shores by early 2004. Reliance's first gas is expected in 2006 and that hinges on timely government clearances.

A lot would, therefore, depend on the prevailing regulatory and commercial environment when the Reliance gas touches Indian shores. Reliance would have to commit large investments now for returns that are uncertain in their quantum four years from now.

Add to this, the projected Rs 3,000 crore investments in setting up retail outlets and the uncertain quantum of investment required for the Infocomm venture. That would give a clear picture of the extent of funds that Reliance would need to raise and support in the medium-term.

sOf course, Reliance boasts of extremely strong cash flows and a solid asset base besides a low gearing, all of which will help it support the above requirements.

But it is also true that the Reliance stock will tend to be valued lower as the company is weighed down by investments whose payoffs are some way into the future. That probably explains the modest price earnings multiple extended by the market to the stock now.

Shareholders in Reliance with the capacity to assume large risk and waiting for returns can stay with the stock while those in pursuit of more immediate returns can consider exiting the stock at the current price.

Re-entry can be considered based on how each of the above factors play out.

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