RIL-RPL merger: A fair deal for all?
RELIANCE Industries Ltd, known to have pioneered the shareholder culture in India, was guided by a simple philosophy while merging Reliance Petroleum Ltd (RPL) with itself. The deal had to be positive for RPL shareholders and at least neutral for those of RIL.
The merger between RIL and its subsidiary RPL that took the market by surprise was almost waiting to happen given the strategic fit and the changed global scenario where selling fuel is becoming increasingly difficult. While stock markets and analysts are still trying to figure out if shareholders in RIL and RPL have got a fair deal under the swap ratio (one of RIL for 16 of RPL), industry experts have given a thumbs up to the deal and the timing of the move.
The tax savings that will accrue to the merged entity were the obvious attraction. The intra-company sales between the two refineries (RIL’s and RPL’s) or even gas sold by RIL to the refineries which would have attracted taxes will now go through without that extra cost. Besides, crude sourcing that has often posed peculiar problems for RIL, given the complexity of its refinery, will now turn to its advantage.
Crude oil suppliers often insist on selling a shipload of expensive sweet crude along with large contracts of the cheaper heavy sour crude that RIL contracts from far and wide to maintain its refining margins well ahead of its competitors. Meanwhile, blending products from the two refineries will help RIL to produce fuel matching Euro 4 and Euro 5 grades, a requirement of the western markets. This apart, the company will capitalise on shipping freight flexibilities to beat hurdles posed by the Indian customs authorities that do not allow two companies to load products in a single vessel.
RPL’s new refinery would have been a burden on RIL’s books for some time in the changed market conditions, but that now stands reduced given that the profits of the depreciated older refinery would help negate some of the high cost implications.
The merger between RIL and its subsidiary RPL was a deja-vu — for many — the older avatar of RPL, which oversaw the construction of RIL’s first refinery at Jamnagar, was merged with RIL. It is another instance of the corporate philosophy of the RIL group that has absorbed subsidiaries into the parent company once the risks involved with the execution of a new venture are taken care of.
But this time around, the factors leading to the merger could be much beyond the guiding corporate philosophy. The 29-million tonne RPL-executed new refinery was commissioned around late December and the first cargoes of naphtha, diesel oil are already on their way to the western markets. It is estimated that the refinery would be scaled up gradually and it would be running full throttle by mid-2009. In normal circumstances full-capacity production would be the time to look forward to as it allows companies to monetise their investments quickly. RIL, which has sunk huge investments, however, is faced with the daunting task of selling fuel at a time when there is a huge demand contraction. The global meltdown has forced most refineries servicing markets such as the US, Europe or Japan to either hold back or slow down till demand recovers. Even RIL’ partner Chevron chose to divest its 5% stake in the RPL refinery instead of scaling it up to the agreed level of 28%.
It is ironical that the very advantage that RIL projected around three years ago when it began constructing the new refinery at Jamnagar has now become its biggest disadvantage, at least for the time being. In 2006 most energy analysts projected demand for oil to grow to 91 million barrels per day (mmbd) from 81 mmbd in just four years, led by a sustained growth in the Asia-Pacific economies. Also, petrol, diesel and jet fuel were expected to account for almost 75% of the increased demand. The International Energy Association had also estimated capacity addition in the refining industry to lag behind at 4.6 mmbd as against a requirement 6.2 mmbd.
RIL hoped to capitalise on the early bird advantage as its new refinery at Jamnagar is one of the most advanced complex refineries, equipped to produce grades of fuel (both de-sulphurised diesel and low benzene petrol) that are acceptable in the western markets. Put simply, the RPL refinery was almost tailor made for the holiday-goers in California who would push up gas demands every time summer set in.
But with almost all developed economies now in deep recession, the matrix has turned upside down. The magnitude of drop is large. For example, in September last year, the decline in US oil demand was of the same size as the absolute oil consumption in India — about 2.7 million barrel per day.
RIL needed to move fast to address the changed market conditions. Merging RPL with RIL is expected to help the company optimise costs on several fronts apart from using the strengths of both to aggressively push products both in the export market and domestically. Will this consolidation be equally rewarding for shareholders?
• RIL is faced with the daunting task of selling fuel at a time when there is a huge demand contraction
• The advantage RIL projected when it began constructing the new Jamnagar refinery has now become its disadvantage
• Merging RPL with RIL is set to help the company optimise costs on several fronts
Monday, March 30, 2009
Metaphor for new Indian middle class
The Shatabdi is definitely the perfect metaphor for the middle class in India, which is morphing and sneakily changing, but in its own way, using its own logic
MANY of us have trouble picturing exactly who the members of the great Indian urban middle class are. Though we talk about them all the time, it still is like pornography: “I’ll know it when I see it but can’t exactly describe it’’. When visiting western businessmen talk, with a gleam in their eye, of investing in India because of the growing middle class, one is a bit worried about what images they carry in their heads about this group. The trouble is that our consumer base is so variegated, that even field research, away from meeting rooms, provides every kind of anecdotal evidence, to confirm any kind of mental picture that anyone might have, on any count.
A recent trip from Delhi to Rishikesh on the Shatabdi was a ‘eureka moment’. The Shatabdi is definitely the perfect metaphor for the middle class. Santosh Desai of Future Brands wrote once that the autorickshaw is a metaphor for India. It can weave its way in and out of utter confusion, is ugly, noisy and inconvenient, but it serves the purpose quite well, at an incredible low price. Unlike an amusing bumper sticker on a Volkswagen that said: “when I grow up, I will become a Mercedes”. The autorickshaw will not grow up to become a car. It will — and is — becoming a much better autorickshaw. But after seeing the Shatabdi, the thought occurs that the autorickshaw may be a metaphor for the lower SEC (socio-economic class) C and D Urban India (roughly the second and third income quartiles of urban India); but the Shatabdi is definitely a metaphor for upper middle India: SEC B, the lower end of SEC A2 and the top end of SEC C (the 5th to 25th or 30th percentile by income of urban India). Roughly that is about a 75 to 100 million people, and is the middle class that we think about.
The Shatabdi is a higher being than the regular train, even if it uses the same old railway station. Even the non-executive, coach class, is quite steeply priced, demand is greater than supply. It comes with an e-ticket, and a certain “culture class” of customers that fits marketer’s definitions of “The Middle Class”. The chair car is definitely like an upper middle class drawing room, and though the air conditioning works well, there is a cocktail of many strong smells in the air. Some of them you soon get used to, even welcome, partly because the strong smell of the cleaner assures you that cleaning has actually been done.
Having not been on a Shatabdi for many years, one was struck by how “upwardly mobile” it had gradually become. And yet, how it has stayed the same on many counts too. Looking at the overhead baggage racks (open racks still), it is clear that a luggage revolution has happened. Smart suitcases (when compared to what we used to see earlier), lots of soft luggage, nylon backpacks — but the same old coolie system, even their uniforms unchanged! The luggage rack definitely made a statement about what progress Consumer India has made and the attitude it now sported, based on what luggage they were ‘wearing’. No uniformity here, no herd mentality, lots of individualism. No boring single brand here, this was the full blown variety of the gray market, importing from around the world! (The same, by the way, can be said for the winter wear of the passengers. No more aunt knitted hand-made sweaters. Wind cheaters of all hues, and machinemade sweaters and caps. And also of the closed footwear. No cumbersome heavy leather shoes in sight anymore.)
THEN came the newspaper boy, in uniform, with an entire range of newspapers. As one clumsily reached into the wallet, after having picked four newspapers, the paper boy says with a cheeky “don’t you know” grin that it is free — on the house, just like in airplanes! The seats actually recline smoothly and the age-old train feature of a ring to place the water bottle in still exists, but now has bottled water, on the house, not carried from your house.
Breakfast comes — same old sad looking contents — in fact much worse quality because it is pre-packed. But the packaging has improved in leaps and bounds. The chana was in a sealed foil container and the baturawas actually more a kind of bread-batura than a conventional batura, folded in the shape of a cone and in a wrapper that made me think it would definitely grow up to be a croissant beater. But the “separate tea’ is here, tea bag, low grade plastic hot water flask, dairy creamer, packed sugar on the side.
The toilets were filthy. Some things never change. But on the other hand they had a roll of toilet paper — a definite evolution in sophistication from the past. However, the toilet paper was dangling from an improvised holder comprising a plastic string. The metric this writer uses to see the state of evolution of a society is the cleanliness of its public toilet and the number of people who light a cigarette under a no smoking sign. By these metrics, both Russia and China are not so great. Our airport toilets are cleaner now but train toilet are not yet so. When will Hindustan Unilever, the messiah of mass consumption, collect some consumer insight on how we use dirty toilets, and give us individual use products that can help us on this count? But that is the subject of yet another article.
The highlight was the customer satisfaction survey that was handed out. It not only was a very well designed questionnaire by a leading market research agency, it had to be self filled, and small disposable plastic ball point sticks, no doubt made in China, were handed out with each. The dimensions of evaluation also reflected the more evolved, higher order needs the new middle India has — cleanliness of compartment floor, windows, and uniforms worn by the staff, as compared to a general cleanliness question that we would have asked earlier; aesthetic appeal of the compartment (definitely a higher order need!), temperature of the meal and body language of the serving staff.
Of course, everyone was on their mobile phone either working or socially networking throughout the journey and a few young salesmen were also on email. When I got off at Haridwar, and was looking for the car that was supposed to pick me up, my coolie said to me impatiently, why don’t you phone the driver, how can he not have a phone!
This is middle class India, morphing and sneakily changing, but in its own way, using its own logic. Just like the Shatabdi.
The Shatabdi is definitely the perfect metaphor for the middle class in India, which is morphing and sneakily changing, but in its own way, using its own logic
MANY of us have trouble picturing exactly who the members of the great Indian urban middle class are. Though we talk about them all the time, it still is like pornography: “I’ll know it when I see it but can’t exactly describe it’’. When visiting western businessmen talk, with a gleam in their eye, of investing in India because of the growing middle class, one is a bit worried about what images they carry in their heads about this group. The trouble is that our consumer base is so variegated, that even field research, away from meeting rooms, provides every kind of anecdotal evidence, to confirm any kind of mental picture that anyone might have, on any count.
A recent trip from Delhi to Rishikesh on the Shatabdi was a ‘eureka moment’. The Shatabdi is definitely the perfect metaphor for the middle class. Santosh Desai of Future Brands wrote once that the autorickshaw is a metaphor for India. It can weave its way in and out of utter confusion, is ugly, noisy and inconvenient, but it serves the purpose quite well, at an incredible low price. Unlike an amusing bumper sticker on a Volkswagen that said: “when I grow up, I will become a Mercedes”. The autorickshaw will not grow up to become a car. It will — and is — becoming a much better autorickshaw. But after seeing the Shatabdi, the thought occurs that the autorickshaw may be a metaphor for the lower SEC (socio-economic class) C and D Urban India (roughly the second and third income quartiles of urban India); but the Shatabdi is definitely a metaphor for upper middle India: SEC B, the lower end of SEC A2 and the top end of SEC C (the 5th to 25th or 30th percentile by income of urban India). Roughly that is about a 75 to 100 million people, and is the middle class that we think about.
The Shatabdi is a higher being than the regular train, even if it uses the same old railway station. Even the non-executive, coach class, is quite steeply priced, demand is greater than supply. It comes with an e-ticket, and a certain “culture class” of customers that fits marketer’s definitions of “The Middle Class”. The chair car is definitely like an upper middle class drawing room, and though the air conditioning works well, there is a cocktail of many strong smells in the air. Some of them you soon get used to, even welcome, partly because the strong smell of the cleaner assures you that cleaning has actually been done.
Having not been on a Shatabdi for many years, one was struck by how “upwardly mobile” it had gradually become. And yet, how it has stayed the same on many counts too. Looking at the overhead baggage racks (open racks still), it is clear that a luggage revolution has happened. Smart suitcases (when compared to what we used to see earlier), lots of soft luggage, nylon backpacks — but the same old coolie system, even their uniforms unchanged! The luggage rack definitely made a statement about what progress Consumer India has made and the attitude it now sported, based on what luggage they were ‘wearing’. No uniformity here, no herd mentality, lots of individualism. No boring single brand here, this was the full blown variety of the gray market, importing from around the world! (The same, by the way, can be said for the winter wear of the passengers. No more aunt knitted hand-made sweaters. Wind cheaters of all hues, and machinemade sweaters and caps. And also of the closed footwear. No cumbersome heavy leather shoes in sight anymore.)
THEN came the newspaper boy, in uniform, with an entire range of newspapers. As one clumsily reached into the wallet, after having picked four newspapers, the paper boy says with a cheeky “don’t you know” grin that it is free — on the house, just like in airplanes! The seats actually recline smoothly and the age-old train feature of a ring to place the water bottle in still exists, but now has bottled water, on the house, not carried from your house.
Breakfast comes — same old sad looking contents — in fact much worse quality because it is pre-packed. But the packaging has improved in leaps and bounds. The chana was in a sealed foil container and the baturawas actually more a kind of bread-batura than a conventional batura, folded in the shape of a cone and in a wrapper that made me think it would definitely grow up to be a croissant beater. But the “separate tea’ is here, tea bag, low grade plastic hot water flask, dairy creamer, packed sugar on the side.
The toilets were filthy. Some things never change. But on the other hand they had a roll of toilet paper — a definite evolution in sophistication from the past. However, the toilet paper was dangling from an improvised holder comprising a plastic string. The metric this writer uses to see the state of evolution of a society is the cleanliness of its public toilet and the number of people who light a cigarette under a no smoking sign. By these metrics, both Russia and China are not so great. Our airport toilets are cleaner now but train toilet are not yet so. When will Hindustan Unilever, the messiah of mass consumption, collect some consumer insight on how we use dirty toilets, and give us individual use products that can help us on this count? But that is the subject of yet another article.
The highlight was the customer satisfaction survey that was handed out. It not only was a very well designed questionnaire by a leading market research agency, it had to be self filled, and small disposable plastic ball point sticks, no doubt made in China, were handed out with each. The dimensions of evaluation also reflected the more evolved, higher order needs the new middle India has — cleanliness of compartment floor, windows, and uniforms worn by the staff, as compared to a general cleanliness question that we would have asked earlier; aesthetic appeal of the compartment (definitely a higher order need!), temperature of the meal and body language of the serving staff.
Of course, everyone was on their mobile phone either working or socially networking throughout the journey and a few young salesmen were also on email. When I got off at Haridwar, and was looking for the car that was supposed to pick me up, my coolie said to me impatiently, why don’t you phone the driver, how can he not have a phone!
This is middle class India, morphing and sneakily changing, but in its own way, using its own logic. Just like the Shatabdi.
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