Financial Wisdom – By Kalidas

Radical Solution for Credit Crisis from Kalidas

How good is the Reliance Petroleum (RPL) for Investors?

with 24 comments


How good is the RPL for investors?


Mukesh Ambani, a Chemical Engineer and MBA from Stanford, spent billions of dollars to build one of the classiest and greenest refinery complex in the world, considered world’s sixth largest, with a capacity of 580,000 bpsd (barrels per streaming day) and 900,000 tons of Polypropylene plant which is nearly completed. Note the following: It was about to come on stream in December 08, but it has been delayed until January 09. Almost US$ 5.5 billions or Rs 24000 crores has been spent so far.


The stock prices have gyrated in sheer speculation from Rs 80 to Rs 250 without anyone knowing what , when and how much the company being invested in will make money. This baby almost 5 years in mother’s womb will come into this world when

1. Oil prices were riding high – a positive for the company to enlarge the margin in absolute terms

2. Polypropylene prices were falling flat

3. Unprecedented credit crisis was catching every businessman by the throat

4. Easy money was disappearing fast .

5. Debt market was getting extremely difficult when its debt rose to almost 12000 crores

6. Equity market collapsed which was the easiest source to replace debt.

7. Interest rates are rising when the debt load was becoming burdensome on its own

8. Credit Default Swaps, Interest Rate Swaps and Forex swaps have become almost dead when RPL’s exposure has increased to almost 7000 crores, although Mr. Mukesh Ambani was very specific in asserting that it was only for its own hedge position.

9. RPL was investing almost Rs 2400 crores in FMP other Mutual Funds to earn daily dividend when the redemption pressure was building on them at the fastest pace. There is no guarantee that he will get the cash as and when needed.

10. RPL was having only Rs 2 crores in kitty against its investment of over Rs 24000 crores in the plant.

11. The parent company Reliance Industries Ltd. (RIL) that own 70% of shares of RPL, is finding marked slowdown in its business at Patalganga, Maharashtra. 400 employees have taken up VRS (Voluntary Retirement) and 800 more are about to take.

12. All 5 plants at Patalganga were closed down recently – though RIL says it was for maintenance purpose. No one closes all plants at same time for maintenance. And it never happened in the past. This news caused sharpest fall in stock prices of RIL over – 10% in a day.

13. The positive news is the plant comes on stream when the world is lacking refining capacity, especially in USA. It will take 3 to 6 years to build similar factory. The plant is situated in Special Economic Zone ready to export to USA if needed for next 5 years at higher margin.

14. The product mix of this refinery is also in conformity with the recent green regulations. Like organic food, the products like Jet-Kero command higher margin. How long we do not know.

15. In short, this baby is borne when there is no more milk around, neither with the mother RIL nor with the foster parents – Investors nor at the hospital (banks). No one wants to play with this soon to cry baby or kiss her with playful message like Aa loo loo, Aa loo loo, gili gili gili gili.


For the convenience of the readers here, I have kept RPL Report for YE 31-03-2008 in the download section (side bar). Readers are also encouraged to download POKAT Reader, a flipping type of PDF reader (free), by which you can read the entire report like a book flipping pages on the computer effortlessly and zooming only the page you want to read. The link is



Let us take the earnings of the company which is the key for the support of share prices. So far, the stock prices of RPL were based on the name of Reliance, Ambani, past successes and penchant of Ambani’s family to give bonus shares from time to time (Indian investors are mad at the bonus event which is nothing but stock price neutral event).

Full production capacity of 580,000 bpsd

(GRM = Gross Refining Margin)

GRM @ $ 12.50/brl as per press report (RPL says only $5.20/brls as per old report. Essar Oil reported GRM at 6.59 for Sep 08 and $12.54 for June 08 in Q2 report)





For 360 days = C3 * 360





900,000 Capacity

Presuming working at 90% capacity = 810,000 MT @ 1450/Mt (Ruling price $1600 – 10% for recession effect)




ADD Bye Product Sales @ 15% of Refining Operation




Gross Revenue (treating GRM part as Revenue)




LESS Cost of Sales and exp. for Polypropylene @ 80%




LESS Cost of Sales, Admin & Misc for refining @ 80%




Earning before dep+Int+Taxes =EBDIT




TOTAL in Rupee terms ($ 1 = Rs 48)




In crores of Rupees =


6,765 cr

6,765 cr

LESS: Depreciation on straight Line basis @ 10%


2,400 cr

2,400 cr

Interest Cost – Long Term

(Earlier the interest during construction stage was capitalized. Once the plant become operational, it will have to be debited to P/L account.)


Provision for Exchange Loss on LT Loans in F/Currencies

(Rupee has devalued by 8% (average) since the loans raised)

Interest Cost (Short Term)

Until now, there was no working capital (WC) requirement. Once the plant become operational, WC will be

US$ 1.392 Bln or Rs 6.682 Cr for 1 month

(10 days for transportation of crude + 20 days of production and distribution and credit)


US$ 218 Mln or Rs 1,047 Cr @2 months for Polypropylene

= Rs 7,729 Cr – Bank Finance 7000 cr

Interest Cost @ 14% at current rate = 980 cr



















1,200 cr





800 cr












980 cr


















2,980 cr

Net Profit before Taxes


1,385 cr



LESS Taxation @ 0 % (Corporate tax) due to extra depreciation allowed from income tax of view (Straight line depreciation is added with extra depreciation of 50% for Initial depreciation and two more shift allowance). The income on PP being in SEZ may not be subject to tax



Profit After Tax (PAT) attributable to Share Holders



1,385 cr

No of shares outstanding



450 cr

Earning per Share (EPS) on full capacity basis



Rs 3.08 /share

PE ratio allowable for RPL

Industry wise PE ratio is 7 to 8 times

Allowing max 20% premium for private company

Maximum P/E ratio allowable for RPL is 9.6 times


9.6 times


Maximum Fair Value Equity Price (PE x EPS) for RPL




Margin of Error




Possible Fair Value Price of RPL on Upside




Possible Fair value Price of RPL on Downside




Momentum Price on Upside/.Downside (Factor +/- 1.5)

When the momentum gains on upside or downside, the stock overshoots by 30% to 50% on either side minimum. On low value stocks (below Rs 35) the volatility is more towards 50%



Rs 31 to Rs 54

Key Numbers and Ratio of Listed Companies in Oil Refining Industry

All figures are for Year ended 31-Mar-2008

In Crores Rs

Essar Oil






Gross Revenue







Gross Revenue per Share














Taxes paid







Profit after Taxes







PAT % of Gross Revenue







Net Worth







No. of Shares







Total Debt







Total Debt to Equity







Market Cap on 08/11/07







Book Value







Stock Price 2008/11/07







EPS 2008/03/31







PE Ratio 2008/11/07







Projected Revenue







Projected EPS







Both Essar and RPL will have to charge significant interest on their debt to P/L account. Until now, it was capitalized. There will also be interest payable on working capital requirements from this year onward due to refineries having become operational. Taking 2 months of Gross Revenue as new Working Capital related debt, it may work out to Rs 1000 crores per year considering high PLR in India today. This is in addition to interest payable on Long Term loans. While arriving at RPL’s profit earlier, we have accounted for Rs 980 crores as interest on working capital

2. RIL will be extremely pressured to raise more capital in difficult market. Essar too will be under pressure but to less extent.

3. Both Essar and RPL will have to provide depreciation chargeable to P/L from this year onwards due to their plant having become operational. No Depreciation was provided earlier.

4. Gross Revenue for RPL is based on average crude price of $80/barrels + PP business.

5. Gross Revenue per share for Essar and RPL is projected one based on full 12 months of operation




It may be noted that RIL may not clock as much revenue as projected. We do not know yet, whether PP facility will be fully operational this year or made operational due to price pressure.


Derivative Exposure of Reliance Petroleum Ltd

Refer to the annual report for 31-03-2008. It is available for download from Company’s website. Its PDF copy is kept in download section of the side bar. Before jumping to any conclusion, please read the official report.


Until 31-03-2008, the RPL was having twin liability under Term Loans. – Foreign Currency Term Loans equivalent of over Rs 10,000 crores (see the report for exact numbers) and Term Loan in Indian Rupees up to Rs 2200 crores. At the same time, the Derivative exposures amounted to over Rs 7700 crores in the form of Interest Rate Swaps (4413 crores), Currency Swaps (1447 crores), Options (1205 crores) and Forward Contracts (667 crores).


It also says the company had unrealized gains on 31-03-2008 (how much we do not know). It also says that Foreign Currency Exposures of over Rs 10,807 crores was NOT hedged. The question arises, when Term Loan in Rupee exposure on 31-03-2008 was just 2200 crores, and the company was not even operational, where was the need for the company to have derivative exposures of Rs 7700 crores?

rpl-derivatives11 Source: Annual Report for Year ended 31-03-2008 of Reliance Petroleum Limited



Let us not speculate and hope that everything is well on derivative fronts. It would be better if the company reports the latest status in Quarterly report preferably with Auditor’s comments, whether these contracts have been valued on MTM (Marked to Market) or HTM (Held Till Maturity) basis. What is the latest valuation? This is important due to acute credit crisis brewing on derivative front.

Where Mukesh Ambani could have possibly gone wrong?

Dhirubhai Ambani, Mukesh’s father, built Reliance group on “equity”. It resorted to temporary debt during construction process in the form of mandatorily fully convertible debentures that had maturity time roughly coinciding with the relative Plant coming on stream. He also realized that the Indian Investors were crazy for Bonus shares (which are neutral event everywhere in the world), so instead of paying hefty cash dividend, he used to distribute paper – Bonus shares. And it worked the magic.


When RIL set up its first Petroleum refinery (not RPL), it was financed based on Fully Convertible Debentures (FCD). At the same time, Birla floated MRPL and it was financed by high fixed rate bonds. The result was that MRPL was almost broke. It was finally sold over to ONGC for just Rs 2/share (current price Rs 40 or having seen much higher price)


Mukesh Ambani made the same error as Birla did. He relied more on debt than equity. He was also enticed by low rate foreign currency loans which amount to Rs 10000 crores or more. He is now caught in a dilemma

1. The oil prices have moved North in last 18 months – almost trebled

2. He could not have anticipated the kind of credit crisis unfolding now.

3. The Debt market is almost dead. It is difficult to raise new money. Jindal, Birla (Hindalco) and Tata (TISCO and Tata Motor) made high end acquisitions at the height of the market and at the height of product cycle.

4. Banks and Brokers collapsed

5. Equity market is almost dead. So much of money has been demanded by banks themselves that nothing is left for the other industries.

6. He has no doubt built one of the finest and classiest refineries, a grand achievement in his technical career of Chemical Engineer, he appear to have faltered on financial front. His MBA did not come to his help. He did not have intelligent and forward looking finance professionals who could have foreseen at least 50% of current events.


He does have advantage of having extra ordinary refinery when the world is facing shortage and there is not enough financial muscle for anyone to go for such refinery in near future of 5 to 7 years. There is no financing available except from Arabs and some sovereign funds. It is possible that he may override the restrictions on refining margins by processing the crude for US which severely lacks the refining capacity.
What could happen to RPL stock – Will it make money?


The product market, currency market, debt market and equity market are all against him. Howsoever capable he may be, he will be running uphill battle for a long time from now on. The best days for Reliance group are nearly over – nothing regrettable – all are in same boat. He has found Patalganga plant unviable, that is why, he is encouraging employees to leave RIL on VRS basis. His retail ventures have also failed; hi petrol stations have also closed down due to price control ( that means that old magic of influencing Government is now waning).


Look at the comparative numbers in the table. RPL has largest number of shares – 450 crores against 34 to 36 crores for BPCL and HPCL, 120 crores for IOC and Essar Oil, 176 crores for MRPL for almost similar size or higher size of operation. With huge yet manageable debt load, the effect on EPS is substantial.


Further, he will be forced to reverse split the shares (4 to 1) to reduce the floating share size ( he alone owns 70% through RIL). When Reliance was in habit of giving Bonus shares to boost its share value, he will be forced to change that practice. If share prices go too low, the stock becomes “Penny Stock” that does not permit US Pension and Retirement Funds to invest into this company.

He has to ensure that the stock price remains above US$ 5 level, that is Rs 250 or more ($ 8 or Rs 400 is better due to down market that we are in) to ensure that it does not degenerate into a penny stock – A Giant company with a Penny Stock?. It will hurt the image when he needs it most.


Even without derivative contracts (presuming all is well), the stock’s earnings do not give me enough confidence,. Why should I pay 27 times earnings, if others are trading at 6 to 7 times. May be we can consider 8 to 9 times, but not beyond. The stock is suitable for trading in Rs 30 to Rs 60 range.


Am I correct in my Assessment?

My assessment is reasonable, but I did not have the luxury of having full knowledge of the proper product mix and the precise time table for placing the entire plant into production. I have relied on macro factors that are usually ignored by others, like potential damaging effects of derivative contracts if they are not what is stated to be in nature. Further, read RPL Annual Report. It is sketchy and dwells into the glory of the past and its promoters. We know that already – go a bit further, Mukesh– give us some specifics what is going to be the product mix, capacity of each product, indicative time table and the markets.


What I would suggest, and not many may be equipped with that, is to read some industry standard research report on RPL from one of the leading brokers with this opinion, and then arrive at reasonable conclusion. If my assessment is found to be flawed, just amend it or ignore it altogether. Do not press panic button on the stock and run for the exit.



If I were you, I would do the following:

1. Reduce the position by 50% at least without waiting for anyone. If your cost is over Rs 120, may be you can hold and think of averaging later.

2. If you hear anything negative on derivative front, simply run for exit. It is really a cause of concern. There is nothing evident if we accept the company’s written statement at face value. Check the latest Quarterly report, and read the notes on accounts and Auditor’s comments.

3. Try to check the prospective EPS on RPL for the coming year from 2 or 3 leading bank or broker’s reports. If the projected EPS is more than Rs 15, stay with it – otherwise think of reducing the position in your portfolio. The time is so good, that there are hundreds of more valuable stocks than RPL in the market place today, and that list increasing day by day.

4. Do not invest too heavily into this counter, unless you have fairly reliable information from brokers or banks or company itself.

5. This is one of the finest Refining company in India, but the value is more important than name. Yes, with equal fundamentals, I would still trust Mukesh Ambani and not Essar Oil. But the things are beginning to become clear. At the moment, I believe Essar Oil is better choice than RPL

6. Even big names fail to perform – look at Birla (Hindalco), Ratan Tata (TISCO and Tata Motor). Easy money pushed these industrialists to venture into unknown with disastrous result. Even Warren Buffet is failing. His Berkshire profits were down by 77% and the derivatives have begun to hurt his insurance outfit as well. His best days are also over. No one is infallible in this market catastrophy.

7. Try to buy back this stock only after some positive news come out and other unknowns like derivatives are known to you. It is better to pay little more with full knowledge, than paying very low in total darkness.

8. If your investment is substantial, better contact RIL’s PR and seek necessary clarifications.



1. Reduce the position by 50% and buy back only after the stock falls below 50.

2. If your investment is over Rs 10 lacs, better consult your Investment advisor or broker who has more information on this stock.

3. Try to sell now even if you want to stay with the stock, with a view to buying back after 20-Nov because of Oil Futures are coming to settlement and huge short position is likely to be unwound. There are over 282000 contracts outstanding on NYMEX alone. (= 282 million barrels of Crude Oil Sweet). If oil rises, the refineries, airlines and auto may fall still further.

4. OPEC may reduce the output again in next 2 or 3 days. Already OPEC chief made this statement yesterday about production cut.

5. Buy back the stock after 20/24 Nov 2008 and see how the oil behaved or mis-behaved.

6. Raise the cash now and think of re-entering after 24 Nov. Meanwhile, take a few days off and spend the weekend with your family



Kalidas Ref: 08-013l

Hong Kong, 10-Nov-2008


24 Responses

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  1. This is scary. I have 5 lakh rupee in RPL at average price of 135. I hope your analysis is flawed though I do not see any.



    November 10, 2008 at 7:03 pm

  2. Kalidas Sir,

    This was a terrific analysis. I dont know to what extent the figures are true and which all assumptions are correct however i must say that your approach is very logical and very easy to understand. This is just like Forecasting of Balance Sheet and P/L account.
    I must thank you for such a Terrific analysis. Please post such logical analysis more frequently whenever you give your view on any stock.

    YSB, Delhi


    November 10, 2008 at 9:57 pm

  3. I have purchased 1600 shares of RPL at 60 Rs 2 years ago.

    What should i do since i am in marginal profit?

    Also there was speculation that RPL will be merged with RIL? Can that happen and what will be the effect?

    Abu Dhabi, UAE


    November 10, 2008 at 10:24 pm

  4. Dear Mr Kalidas,

    The way you are making the report is too good. It requires great effort to coolect the data and provide the detailed effect.

    You are showing your experience and helping small investors to know, how the valuation should be.

    Much appreciated.




    November 10, 2008 at 10:49 pm

  5. Dear kalidas,

    if we apply the same RPL fair PE formula for Essar oil, it should be trading in -ve because EPS is in negative and will be in negative for coming quarters but you had a buy call on Essar oil. just baffled, why a different yardstick for Essar?


    0811-051 Kalidas Replies to Bharat (Tuesday, November 11, 2008)

    Post your message after spell checking. The messages are very taxing to read. I can not do your job.

    You are referring to Mar 08 figures when the Essar Oil did not run into production. Essar effectively started refinery this year. for entire 2007, its sales were Rs. 562 crores. In first June 08 and Sep 08 the sales were and Rs 13,717 crores respectively (Total Rs 20,000 crores or more in first 6 months). The company also came to profit during 2008. The figures are not comparable. However, in the light of production started, I will evaluate Essar more closely than before.

    Essar has 119 crore shares outstanding. In fact bulk of them, over 70 crores, were issued by Essar Management to themselves by issuing FCCB to themselves convertible into shares @ Rs 11 or so, when the market price was over Rs 30. This was approved by SEBI. This was one of the biggest fraud thrust upon the shareholders by Essar management in connivance with SEBI. Otherwise, the EPS would have been nearly 4 times. I had raised the voice on MMB – then who listens?

    When highly capital intensive Project comes on stream, like that of Essar and Reliance, the depreciation and interest cost start appearing, in the balance sheets. During construction stage, Depreciation (non cash charge) is not accounted for. Interest paid is also capitalized so they are not debited to P/L account.

    These are major costs. Now that both plants have gone into production, substantial cost of depreciation (about 10% of investment into Plant and machinery) will be reflected. This works out to Rs 1000 crores for Essar and about Rs 2400 crores for RIL (Actual figure may be different). Interest cost for working capital as well as Term Loan will also be charged. This figure is also very large – between Rs 1000 crores and Rs 2000 crores per year. These two costs alone work out to Rs 3000 crores to Rs 5000 crores depending on each company.

    While RPL does not produce oil, Essar does to smaller extent. That adds good value to Essar share. Since both plants are now in production, and Essar is ahead of RPL, we are favouring Essar Oil at the moment.

    Given the choice of management in terms of quality, integrity, ethics, morality, share holder’s interest, Mukesh Ambani is more preferable than Ruia. The only big negative for RPL is its exposure to Derivatives of Rs 7700 crores. If the losses are just 20%, it works out to Rs 1500 crores or Rs 3 per share when the plant is not even in production.

    I have to see whether Essar Oil also has similar derivative exposures. Such items are concealed deep in the notes to the balance sheet. Whenever the large companies borrow or raise the capital from the market having no immediate use, they go on squandering in playing with Forex market and derivatives. Having large cash is also big negative for many companies – we do not know when it will disappear.

    Read RPL report – over Rs 2200 crores have been invested in mutual funds. So, you invest in Ambani presuming that he will use it in the petroleum project, he in fact goes out and invests the cash in speculation like Mutual funds. So an investor gives his money to Ambani for management, and Ambani gives that money to Mutual fund for management.


    November 11, 2008 at 1:53 am

  6. Sir,

    Mukesh was a drop out from Stanford, he is referred as someone studied for a while there. He did not complete his degree.

    Best Regards


    November 11, 2008 at 9:15 am

  7. Wonderful analysis , I think most of the retail investors has invested in this counter on assumption that after production start there will some gain .One thing I am not able to understand why many fund managers have invested heavily on this scrip



    November 11, 2008 at 11:45 am

  8. Time to Ponder
    As per the details mentioned in the article, it can be very well said that the Stock market is same / similar to the lottery or casino business. I have heard very often from brokers (dalals) as they may be called that reserach has shown that investments in equities have yielded better returns over long periods of time ,but they fail to mention for whom (for brokers and persons with insider information only). The common investor (who in this case might have purchased the stock around 200 or more) on rumors generated by paid brokers have lost a hell lot of money.
    Similar to the fact that there cannot be independent directors, there is also a fact that there are no independent auditors. So what face value does their report have, since if they raise a voice why would they be entertained by the company.
    The whole business of stock market is fleecing the common man of his money and resulting in a luxurious life for the brokers (this can be verified by the lifestyles and accounts of the brokers).
    Why should financial frauds not be treated similar to crimes against state (as in case of murder the individual would die in one shot, while in financial frauds the investor would die a slow death together with his family).
    So folks think again before you leap towards the stock (market)exchange. In fact the BSE entrance is showing you that you will get engulfed by the serpent anyway.



    November 11, 2008 at 12:08 pm

  9. Kalidasji,
    I remember you wrote a nice article on reliance and Mukesh and Anil sometime back on MMB.

    You have mentioned the way reliance doing N no of business from footwear to food shows how immature they are. You also predicted reliance at 600 – 900 and people were making fun of you. I remember a sentence from that post “If prost*on is legal, there will reliance prost*on Ltd”

    Looks like your analysis is coming true.
    The good days of reliance might be over soon.

    Best regards.
    Chennai, INDIA.

    0811-053 Kalidas Replies to Prashant (Wednesday, November 12, 2008)
    We can not write off Reliance so soon. It is just commodity cycle that has turned against them due to manipulation of dollar by the United States through paper derivatives. They are in solid industry with great vision.

    Yes, their prime time is over for the time being. Unless they have made mistake in derivatives, they will come back but with a few core projects. They will mellow down, and of course, they can no longer think of beating Warren Buffet and Bill Gate for 10 more years to claim the title of world’s richest man.


    November 11, 2008 at 3:41 pm

  10. Excellent article again dear Kalidasji..!!
    Thank you very much..!!
    St.Ann’s Bay,

    Thanks for writing continuously Dr. Tungala – Kalidas


    November 12, 2008 at 10:51 am

  11. supperb analysis. can you give a brief overview on RNRL as the case is near to the hearing and every one is keen to know what will be the result. How good is it to invest in RNRL for long term?


    November 12, 2008 at 12:46 pm

  12. Dear Respected Kalidas Sir,

    Excellent views. I just wanted to ask you one thing – you had predicted riots in America, but fortunately they have not happened.

    Is it possible that some time your views might not be 100% correct. The reason I am asking you is because our family has NRI GBP and we are not sure if we should convert it into USD because you had said GBP will fall.

    I respect you very much and your knowledge, only not sure if I can change all or just change part of it.
    Please do not take it in wrong way.

    Also sir, when is your book being published in the market and who is your publisher?


    0811-058 Kalidas replies to Amit
    Death, Accidents, Stock market crash and New Customer can come at any time. There are no time bound predictions. I am not God. Listen to everyone and take your own decision. Whether GBP falls or not will be again a matter of prediction. If you disagree based on what I have said, ignore my views. You always take a chance in action.


    November 12, 2008 at 9:53 pm

  13. Dear Kalidasji,
    At last USA seems to have realized the situation now. Paulson abandoned the plans of buying the toxic Mortgage assets. You have been reiterating the same action i.e., not to touch/buy the toxic assets, i.e.,throwing good money for bad worthless derivatives. I think US HEADS have come to YOUR WAY in a great way for the benefit of US and rest of the World. They might,however, have copied your views from your letter,but I’m happy that your ideology prevails for the benefit of mankind for which every boarder of this blog should be proud of the greatest works of our beloved Kalidasji.

    Thanks and Regards,

    0811-057 Kalidas Replies to Dr. Tungala (Saturday, November 15, 2008)
    It is not what appears to be. Read my reply to Shiva under Ref 0811-056 of same date.


    November 13, 2008 at 11:51 am

  14. Hi Kalidas,

    Why have you not included Cairn India in your comparison? Please give your views on Cairn India too. Thanks.

    S. Muthu Raman
    Chennai, India

    0811-058 Kalidas Replies to S. Muthu Raman (Saturday, November 15, 2008)
    We have compared the Refineries and not explorers or producers. To my knowledge, Cairn is explorer/producer. Even ONGC was also not included for same reasons. I had accepted the group from Moneycontrol direct. The explorer are extremely difficult to evaluate. You need lot of inside information about the progress in their exploration activity. On the face, they blow trumpet because they want investors with them all the time. I therefore do not touch explorers,

    Muthu Raman S

    November 13, 2008 at 11:58 am

  15. Kalidasji,
    Paulson has declared that FED will not buy bad debts of banks but instead will use the 800 billion to re capitalize them so that they can lend more to good businesses. Is this not what you have been saying all along . Will this solve the problem & push up growth in US Industrial sector.
    Also , can you tell us why you feel that China’s capital infusion plan is not true. They couldn’t be blatantly lying going into the G20 meet.
    I had sometime back asked you if this wasn’t actually a good time for India & China to collaborate considering that nearly half the worlds GDP growth is happening here ?


    0811-059 Kalidas Replies to Deekay (Saturday, November 15, 2008)
    Read my reply to Shiva under Ref: 0811-056 two Para following this one.

    China – do you know what is $560 billions? What the Chinese are going to do – build the roads, bridges, dams? Not really, see their consumption. While Steel has gone up, cement consumption has remained static or has lower growth. Why? steel and cement are like brother and sister – they go together. If they are not using in infrastructure, where else the millions of steel is going? Making Armaments like guns, tanks, AK47, missiles, SAM etc.
    It is a country of iron curtain. They, like USA, follow same policy – to let you know what you should know in their opinion.

    They do not even pay Yuan 2000 to their workers who stay away from their family and live in same compound where they have factories. They work almost from 7:00 AM to 10:00 PM with about 3 hours of breaks. Do you think that Chinese government will disburse $500 per person or $2000 per family = Yuan 14000?

    G20 is an association of eunuch. They were invited to White House as PR exercise. What are they going to do for American economy? It is their job. Just go back home and attend your country’s problem.

    Yes, China and India will lead the growth in the world. Growth today is related directly to the extent of population – Period.


    November 13, 2008 at 12:50 pm

  16. Hi,

    Your analysis for RPL is impressive. I would like to know your views on some points like .

    1. post annual report of RPL been declared, RPL has managed getting CRISIL’s ‘P1+’ Rating bank facilities on 30 Sept 2008 as mentioned on BSE India’s web site under Corporate Announcements of RPL. Does this imply that things are good enough with RPL’s balance sheet and problems related to derivative exposure been taken care off..?

    Secondly RPL announced it’s got 97% work on refinery completed and it’s understood that it’s in commissioning phase presently. But there are also concerns in oil market internationally and drop in oil demand internationally for RPL would create problems and RPL will face tough times to sustain it’s business and maintain profit margins till year 2010.

    2. Is 7500 cr loss big enough for Reliance group…?

    Reliance group might have already anticipated and taken enough measures to arrest the problem. That might be the reason for Mukesh Ambani selling 4% stake of RPL at above 250 levels few months back. please share your views on this.

    3. Where do you see RPL and reliance from here 5 years and more down the time from here considering their businesses in refineries like RPL, Oil and gas production from KG basin, retail business, etc.

    Everyone would be willing to know price levels for RPL in coming times. will RPL be able to sustain price levels above US$ 5 levels in coming months around Jan 2009 and beyond.

    Lastly, would request your kind of analysis for ICICI Bank as well similar to RPL. I don’t have any holding with this scrip but since it’s sort of iconic and major contributor to index levels since last few years, we all would like your analysis in view of the problems it’s been facing presently. Kindly oblige us with that.

    Ajay, Mumbai.

    0811-066 Kalidas Replies to Ajay (Sunday, November 16, 2008)
    When a reader ask the pointed questions, I begin to respect him. You are one of them. Your questions are precise, pointed and well studied one. Now answer time.

    I never believe them. They are meant for corporate, not individuals. Further, they never serve as tool for advance warning. They apply Amul butter to well known corporate. There is also lot of corruption to get the higher rating that reduces the corporate’s borrowing cost.

    Even today, USA is rated AAA with humongous problems and its lenders like China with over $1.9 trillions of Forex reserves, over 50% in US$ itself, is rated much lower than USA. The reason is the US debt is in their own currencies, and US government is in position to meet the debt by printing money under its own control. They disbursed over US$ 2 trillions (by Bernanke) and Paulson ($350 billions so far) without having a cent of income, and yet they are rated AAA by Moody (who is always moody) and Standard & Poor (whose standard is always poor with whom CRISIL has tied up)

    To be quite honest with you, these rating agencies are useless. They are all inward and backward looking, never look beyond the Annual Reports nor do they study the liabilities of corporate in fine print. They are all bunch of opportunists. This is why the rating agencies rated almost junk debt to highest investment grade only because of names like Citi bank, JPMC Bank of America. They never went below the surface. You know the result.

    So forget CRISIL’s rating of RIL. They do not want to lose giant customer like RIL. They will follow the policy of appeasement so long as RIL is favored by the press and public. Once the RIL starts attracting bad publicity, they will start re-rating exercise with negative bias.

    The 7700 crores of derivative exposure will not be reflected into RIL books. Both are separate companies. In fact, entire liability of RPL in connection with the plant, machineries and land is guaranteed by RIL. Now go to the website/Annual report of RIL and see the Auditors’ comments. Do you find RIL’s 24000 crores of contingent liability under guarantee for RPL over there?

    Their Auditors Chaturvedi and Shah are with RIL since 1975 (old name was J R Shah), and they would not do anything to write substantially negative. There is no rule that a listed company’s Auditor’s should be changed every 4 years ( so that new Auditors will at least disclose something which was not reported). We have election every 5 years, but there is no rule of change of Auditors term. It continues in perpetuity.

    A running company is always better than idle company. When a company is in production, it recovers part of the fixed cost, an idle company can not. If the plant remains idle, it gets rusted and will need more maintenance. There is a saying in Gujarati that ” Feed the factory all the time, otherwise the factory will devour you”

    If the RPL plant is not in production, it will attract fixed cost of Rs 2500 crores with interest (without depreciation). the loss works out to Rs 5 per share. And you never know when the basic oil cycle will change – right now the low prices are due to paper manipulation, Enron like, which will not last ever. Essar Oil is in production now since May – they are not facing problems, in fact their profits have improved. Both are in same field, same place with similar facility.

    It is still not a loss. your question should be Derivative exposure instead of loss. It is too large amount for any company. When Indian Oil Corporation lost Rs 6700 crores recently on Rs 200,000 crores turnover, some boarders shouted at me for recommending IOC some time earlier. What is reliance with only Rs 40000 crores of Refinery operations?

    The RPL capital is about 12000 crores. 2/3rd will be wiped out if it turns out into complete loss. In such types of trades, you lose entirely in present market. The bankers usually have negative covenant in the loan document that if the capital of the company falls below trigger level, the advance would become repayable immediately.

    The group as a whole is placed in very strategic business. They are in best business. If there was no negative of derivative exposure of the magnitude 7700 crores without any activity, I would not have been negative on the group at all. Yes, it was overpriced earlier due to Ambani hype. The present problems on oil front may not last long – as I have said it is due to paper trading on ICE (London) and NYMEX/COMEX USA. This is why I am bullish on Gas sector where RIL reportedly found rich discovery in KG Basin.

    It is likely that Chevron might act as vulture if acute problems flare up in RPL. Sometime I wonder whether RPL was forced into this position at the instance of American corporate so that any problem later will make RPL as easy prey. US does not have refining capacity, and ready made plant of highest order will be ready for Chevron when US needed it most.

    RPL price level depends on the outcome of next Quarterly report. On its own, RPL is good, financially weak due to derivative exposure. If the troubles flare up, I would not be surprised to see very low price of RPL. It could be as low as mid teens in troubled times, and 30~50 in good times, certainly not at this level for next 2 years.


    November 14, 2008 at 3:23 am

  17. kalidasji,,

    I am holding indiabulls finance, indiabulls real estate, indiabulls securities. all 850 shares @ combined avg cost of Rs. 500. Laxmi mittal has invested good some of money in this group.

    whats is your opinion on this group / company.

    CA. Sanjay Shah Mumbai, India

    0811-064 Kalidas Replies to Sanjay Shah (Saturday, November 15, 2008)
    You are not Mittal. He is a speculator – he can afford to because he has sold his shares at large premium to others, You can not do that. Stop the practice of “Name Investing” . This is where most go wrong – almost 99.99%

    Honestly, I do not like this group at all I never invest into Brokers (the story tellers), Utilities, and even /software stocks because I do not understand them. Only those invest in Utilities who do not know how to invest. Dummies invest in Utilities. In short, wherever the earnings are certain, and easily calculated, there is not much excitement left. So those stocks usually do not rise.

    Do not give me average price of 3 different companies in different industries. Each company is different. I own only IB Retails – small quantity of 3500 shares. But I did not buy because of IB. I bought as industry they were in.

    Send me the prices of each, and I will try to send you solution.

    Sanjay Shah - Mumbai, India

    November 14, 2008 at 12:09 pm

  18. Dear Dr.Tungala,

    Thats true. Kalidasji is beloved to all of us. His wisdom is guiding light in this dark days.

    Rajmohan babu, Pointe-Noire, Congo

    Rajmohan babu

    November 15, 2008 at 3:47 am

  19. Hi Sanjay,
    He already gave the answer for this India-bulls query, I just copy and pasted here.
    0811-033 Kalidas Replies to Rahul (Thursday, November 6, 2008)
    Brokers’ stocks are Bull Market’s stocks. In fact, one should NEVER buy broker’s stocks. About 10 months ago, I told everyone on MMB to avoid Brokers’ and Insurance company’s stocks. and you are seeing the result today. – All top brokers like Bear Stearns, Merrill Lynch, Lehman Brothers have failed and Morgan Stanley and Goldman Sachs are severely bruised. The brokers usually manipulates their own stocks by spreading rumours, big talks. When people feel strongly to buy the Broker’s stocks, it is usually first warning sign of end of the bull market run. This is why this broker’s name is India Bulls.

    I would sell India Bulls fin Serv. who have only paper assets; and switch to hard assets owners like Essar Oil, Essar Shipping, IFCI, RNRL (relatively safer ones) and DISH TV, Arvind Mills, SpiceJet, IB Retails (of same India Bulls group) with relatively lower safety and King Fisher Airlines (more risky, but equally more rewarding).

    I do not know your risk taking appetites, If you are not businessman, but a salary earners, better go for more safety like Essar Oil followed by Essar Shipping. (although some people might give very unfavourable opinion on Ruia family)

    I think this one will be helpful for you

    Rajmohan babu, Pointe-Noire, Congo

    Rajmohan babu

    November 15, 2008 at 3:56 am

  20. Sir

    I am one among the regular reader of your articles. This is excellent analysis.

    Just to recall your earlier analysis

    Ratan Tata done a great mistake by acquiring Corus, etc. Since increasing dept will create problem


    The Ratan Tata informed to all the CEOs of their subsidiary that they are in great trouble in making the credit line (main reason – foreign acquisition) , ask them to create the credit line even with higher interest rate and hereafter stop the acquisition.

    Reliance is doing the mistake by diversifying into too many areas


    Now everybody feels that, many of the Reliance subsidiaries are facing negative growth and it will drag the RIL and they should shutdown diversified area and should concentrate on their core area

    Paulson is doing mistake by buying the distressed mortgage instead he should use the money for the fresh loans


    Paulson withdrawn from buying the distressed mortgage of banks

    I salute your analysis. Need help on your picks

    The hotel and entertainment industries growth are based on the economy. If the economy in the downtrend, the prime sectors will get affected first are financial sector, real estate and auto.

    Next the effect will spread to hotel and entertainment. However in the recent picks suggested by you, some of them from hotels and entertainment. Can you elaborate the way it is picked.

    Since after seeing the analysis of RPL and Essar, what ever you are suggesting it might have good base and we are missing or not knowing how to analyze the sectors.


    0811-069 Kalidas Replies to R Yuvraj (Sunday, November 16, 2008)
    Spell check your message, before you post, please.

    India is now very well known abroad. The tourism will flourish more due to business and also leisure. GOI is also doing right thing in advertising abroad of India as Tourist destination. They with Air India are also aggressive. Unfortunately, other private sector are not joining Government in promoting India which is in self interest.

    Hotel rooms are in short supply. The tariff is very high and quality very poor. India is perhaps one of costliest place to stay in 5 star hotels. I was told that Sheraton Maratha in Mumbai charged almost Rs 500 to 800 for normal alcoholic drink. This is outrageous. The hotel rooms compared to rates are lousy. One I stayed in a hotel on waterfront hotel paying Rs 3800 per night and it did not have even charging point for mobile phones.

    Government recently exhorted hotels to lower the tariff which was a stupid move. There is 30% luxury tax on hotels which is prohibitive. Why not Governments reduce taxes of 30% to almost NIL or 5% at state level, to attract more tourists?

    India does not have enough hotel rooms. During next 12 to 18 months, the Government and Tourism Finance Department should exhort hoteliers to build the hotels during slackness, and if necessary given them concessionary interest. By the time the economy is on recovery path, the greater number of rooms will help tourists to find better hotels at reasonable prices.

    During my 2007 December visit to Goa, the hotel prices in 5 star hotels were as high as Rs 20,000 to Rs 25,000 per night. This was exorbitant by any standard.

    Weaker rupee also helps hotels. I am bullish on this sector now. May be there my be some cut back in corporate sector on travels, but it may be temporary for a few months or so.

    The troubles in finance sector, auto and real estate is only a blip. The troubles abroad are country specific. India is strongest place in all these area. There are no substantial losses in finance sector, national highways are being built at greater pace that helps Auto sector. and sheer population need greater housing. Yes, high flyers in real estate are burning their fingers – their hypes are gone and senses have returned to them. This is good. The quality of housing has improved a lot. What we used to buy in 1980 is much inferior to what we get today. Good correction was due, so it has happened. Let it continue for some more time and let bad weeds die and run away. we have to flush the system once in a while.

    The Entertainment sector has made rapid stride. It will be the most creative and job oriented sector to grow. Just look around – quality is improving at fastest pace, more and more young talents are entering this industry instead of dud stocks in banks or otherwise. With advance in electronic media, this sector will outperform even Gem and software sector in exports in next decade. Next 10 years belong to Entertainment industry. Position yourself now.

    DO NOT FOLLOW ME BLINDLY EVEN IF I AM RIGHT AT TIMES. One should invest discreetly. It is your money, so use your own intelligence and common sense. Everyone has good or bad time, and I also had that share in my last 20 years. So do not make me larger than life. I am good where I am.

    R. Yuvaraj

    November 15, 2008 at 2:42 pm

  21. Hi Kalidas,

    I personally feel your views and further interaction with boarders is a great stage of learning and gaining knowledge. Today various television channels, newspapers, websites are mediums which generally react to events and feed us news that has already passed us. Yours knowledable foresight, guidance and analyzed views are no match against them. You are doing a great service and I am sure many small investors like me must have benefited from this.

    Kindly provide your views on my posted query on 14 Nov related with RPL. I was in first place overwhelmed by your study and analysis related to RPL. I tried my best to put together my thoughts in my post.

    Best regards,


    November 16, 2008 at 4:26 am

  22. Good Evening Kalidas sir,
    I have 7000 shares of RPL at average price of 170,
    What you will suggest me at this level can I exit this stock and enter into another pl suggest me.

    Tushar Patel,
    Iowa USA.

    0811-118 Kalidas Replies to Tushar Patel (Tuesday, November 25, 2008)
    You must be die hard fan of Ambani to have bought such large position in a company that has not even started the production. I will not be in position to take the view on this company until I know its performance report for 3Q (Dec) that may be out in January

    If I were you, I would do the following:
    SELL 3000 shrs in a rally, price between Rs 80 to Rs 92 and retain cash (+Rs 240,000 plus) Buy only when below Rs 30 – Buy 8000 at that time with same money.
    SELL 2000 shrs now @75 and apply to the following:(+150,000)
    Buy GAIL 200 @ 201 (-Rs 40,004)
    Buy MRPL 2000 @ 36 or below (I prefer Rs 31 or about) (-72,000)
    Buy Suzlon Energy 1000 @47 (-47,000)


    November 25, 2008 at 10:15 am

  23. Friends,

    I am seeing unusual reading activity of this article. it appeared on 10/Nov and of late readership had been moderate.

    However, today I am seeing sudden interest in this article – the readership soared 15 times. I also saw unusual trading in RIL, which too dropped by 6.8% on heavy volume. Does it have any connection? Have any of you come across any news that may be shared here?

    Kalidas, 25 Nov 2008


    November 25, 2008 at 11:07 pm

  24. Hello sir,
    I have sold my position in this counter yesterday,
    I have bought IFCI – qty 7000
    Esssar shipping -Qty 7000
    Suzlon Energy – qty 7000 for 1 year period

    I still have question abt Suzlon Energy. I have bought this share at price of 43 Is this fair value for this share ? what you think.

    kalidas, 26/11/08( Looks okay to me. However, do not remain invested 100% – keep at least 30% aside to participate in sudden market fall. Do not use that money elsewhere. You may also buy Gold and Silver to the extent of 15% of portfolio at current prices
    Is that ok.

    Thank You for helping me out




    November 26, 2008 at 10:26 am

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