Reliance Industries may invest more than Rs 1,00,000 crore in various businesses in the next few years, but concerns still remain about use of cash flow by the billionaire Mukesh Ambani-led conglomerate, a report has said.

The mega investment plan has been outlined in an equity research report by global investment banking major Morgan Stanley, which incidentally happens to be the financial advisor in international energy giant BP’s proposed partnership with RIL.

The investments would be mostly in E&P (exploration and production), petrochemicals and shale gas by RIL, which as per Morgan Stanley, has already announced investments totalling $7.2 billion (over Rs 30,000 crore) since January 2010.

The large investment pipeline notwithstanding, Morgan Stanley said that it was concerned over limited clarity on the use of cash flow by RIL.

Noting that cash flows being bigger than capex (capital expenditure) size was leading to an uncertainty, Morgan Stanley said that its concerns mainly stem from three issues — lack of clarity of deploying cash flows, E&P remaining a dampener and lower petrochemical netbacks.

The netback is calculated by deducting from the total revenue the entire costs incurred in taking the product to the market. These costs include those associated with import, transportation, production, refining and royalty.

Morgan Stanley detailed RIL’s investment plans and concerns over the mismatch with cash flows, along with a disclaimer that it was an advisor to BP on RIL deal.

Morgan Stanley is acting as financial advisor to BP in relation to the proposed partnership with RIL as announced on February 21, 2011. BP has agreed to pay fees to Morgan Stanley for its financial services,” it said in the report.

RIL plans to spend $10-12 billion (Rs 45,000-54,000 crore) in petrochemicals business over five years and a similar amount in its E&P business, Morgan Stanley said.

The report further said that RIL was estimated to invest a total of close to $11 billion (about Rs 50,000 crore) over the life of its three shale gas joint ventures in the US, including the acquisition costs.

In the five years alone, the company was estimated to invest $4-6 billion (Rs 18,000-27,000 crore) in its three investments in shale gas, it added.

Earlier at an investor conference in February, RIL had projected investments totalling $25-30 billion (Rs 1,10,000-1,35,000 crore) for the next five years in its various businesses, including energy and telecom sectors.

The company also said in an investor presentation in April that it would pursue both organic and inorganic growth opportunities and disclosed an “investment programme of over $10 billion to cater to domestic market” in petrochemicals.

The Morgan Stanley report said RIL could see an annual capex of $3-4 billion in E&P and petrochemicals businesses against an incremental cash flow of $7-8 billion a year.

The expected receipt of $7 billion from BP deal could further increase the cash flow in the current fiscal and lower the E&P spending, the report said. But, investments in telecom and retail businesses could fill that gap, it added.

“However, these would be longer gestation projects, and the industry landscape is highly competitive,” Morgan Stanley said about the retail and telecom sector plans of RIL.

It noted that RIL ventured into retail in 2006 and it was estimated to have spent $2.5-3 billion so far in setting up over 1,000 stores. Besides, it has already invested $2.8 billion in telecom towards acquisition of spectrum.

In addition, the company has forayed into hotels, insurance, aviation, sports marketing and financial services industry.

On BP deal, Morgan Stanley said that the transaction could considerably affect RIL’s earnings as its share of E&P volumes, revenue and EBITDA (earnings before interest, taxes, depreciation and amortisation) would decline due to a fall in stake from 90 per cent to 60 per cent.

At the same time, the company’s other income would increase due to interest earned on $7.2 billion payment from BP.

Overall, RIL’s earnings was expected to decline 1.5 per cent in the current fiscal, but rise 3 per cent in the next, Morgan Stanley added.

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