th

Acquisition
S. M. Fakih of IPCL by Reliance 29 December 2006

Acquisition of IPCL by Reliance

The expected had happened unexpectedly. While everyone expected Reliance to bid
for IPCL aggressively, but what an aggression!!

The results of the bid, for 26%of equity, announced on 18th May 2002, were:

Rupees/share
Reliance Industries Ltd (RIL) 231
Indian Oil Corp (IOC) 131
Nirma 110

The bid price was at a 74% premium to IPCL’s last traded price.

There were wide spread speculations on why Reliance bid was so higher than the other
bidders.

One newspaper had the explanation :

"Market circles are still struggling to come to terms with the surprise of Reliance bidding so
aggressively for IPCL. The bid - more than twice the reserve price when the rivals were under it -
is certainly not characteristic of RIL, which has established a reputation as a conservative bidder,
whether in privatisation deals or in telecom licenses. So what explains the exception? The RIL
grapevine has it that after the consultants had submitted their valuation of IPCL, the two brothers
decided to add on a premium to play safe. The patriarch then intervened to add on a further
premium. This one, he apparently observed, was as a mark of gratitude to the Disinvestment
Minister for not putting a spanner in the works despite a history of hostility between Shourie and
RIL dating back to the eighties."

Mr. Arun Shourie, Minister of Divestment, had something interesting to say :

"During the privatisation of IPCL my ministry came under a lot of pressure to prevent Reliance
from bidding for it. There were attempts to disqualify the group from the bidding process, to the
extent that the entire disinvestment process came to halt. But I went by the Government policy
which clearly specifies that if the bidder fulfils all the norms, he will be eligible," the minister said.

"During the entire bidding process, Mr. Dhirubhai did not telephone me even once. But he knew
what was happening as he had sources in all the right places, which mere journalists like me did
not even know existed. Soon after Reliance acquired IPCL, Dhirubhai called me up and in
emotional tone said he knew what I had been through and that he and his family would be
grateful for my effort. But I had just done my duty of following the laid down norms."1
Another story justifying high bid price was that since Reliance had earlier lost bids for IBP (Petro
products retailer perceived as an ideal fit for Reliance which had refinery, but no retail outlets),
and VSNL (telecom giant, thought as a great fit for Reliance’s forays into telecom), it wanted to
acquire IPCL at any cost.

Dr. Hikaf, chief of financial research of PSD Investments, decided to unravel the mystery and
put together all the information available on the subject.

Prof. S. M. Fakih (smfakih@gmail.com) prepared this case as the basis for class discussion
rather than to illustrate either effective or ineffective management.

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Acquisition of IPCL by Reliance

IPCL – Govt. foray into petrochemicals

Indian petrochemicals Corporation Ltd (IPCL) were established in March 1969 as a Government
of India undertaking, with the objective of establishing a petrochemicals company and
developing the petrochemicals market in India. The construction of first petrochemicals complex
began in 1970 at Vadodara in the state of Gujarat and commercial production at this complex
commenced in 1973. Second petrochemicals complex was commissioned in 1992 at Nagothane
in the state of Maharashtra and the third complex was commissioned in 1997 at Gandhar in the
state of Gujarat.

IPCL is the second largest petrochemicals company in India, next only to Reliance Industries
Limited. It is ranked as one of the top 50 companies in India in terms of sales, with net sales in
fiscal 2002 of Rs.47, 400 million. While the sales-mix varied from year to year, about 75% of net
sales were from polymers, balance more or less equally divided between fibre and fibre
intermediates and chemicals. More than 90% of net sales were from the sale of products in the
Indian market.

IPCL operate three integrated petrochemicals complexes in India: a naphtha based cracker
complex at Vadodara; a gas based cracker complex at Nagothane; and a gas based cracker
complex, at Gandhar. Vadodara complex includes a naphtha cracker with an installed capacity
of 130,000 tonnes of ethylene per year as well 15 other downstream plants currently in operation
for the manufacture of various products. These products include Low Density Polyethylene
(LDPE), Poly Vinyl Chloride (PVC), Polypropylene (PP), Polybutadiene Rubber (PBR), Acrylic
Fibre (AF), Dry-spun Acrylic Fibre (DSAF), Ethylene Glycol (EG)/Ethylene Oxide (EO), Linear
Alkyl Benzene (LAB), Acrylates and Benzene. The Nagothane complex includes an
ethane/propane cracker with an installed capacity of 400,000 tonnes of ethylene per year and six
downstream plants for the manufacture of LDPE, Linear Low Density Polyethylene (LLDPE)/
High Density Polyethylene (HDPE) in swing mode, PP, EG/EO and Butene-1. The Gandhar
complex has an ethane/propane cracker with an installed capacity of 300,000 tonnes of ethylene
per annum, a caustic chlorine plant and four downstream plants for the manufacture of Vinyl
Chloride Monomer (VCM), PVC, HDPE and EG/EO.

Indian Petrochemical Industry

Products
The Indian petrochemical industry produces a wide range of products.

Olefins: These are obtained from naphtha or natural gas. Major olefins produced in India are
ethylene and propylene. Ethylene is the basic building block of complex products and the most
produced primary petrochemical. Against the total capacity of over 2.4 million tons per annum,
the production during FY 2001-2002 was at 1.99 million tons. Benzene and Toluene are the main
aromatics.

Intermediate petrochemicals: These are used as raw materials for other downstream products
such as synthetic fibers. The major intermediate petrochemicals are dimethyl terephthalate
(DMT), purified terephthalic acid (PTA), Mono Ethylene Glycol (MEG), paraxylene, caprolactum
and acrylonitrile.

Polymers: Major polymers include the polyethylenes, poly vinyl chloride and polypropylene.
RIL, IPCL, GAIL India, Haldia Petrochemicals are the major players.

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Acquisition of IPCL by Reliance

Synthetic fibers: Major synthetic fibres are polyester staple fibre, viscose staple fibre, and
polyester filament yarn.

Elastomers: The major elastomers are styrene butadiene rubber (SBR), polybutadiene rubber
(PBR) and nitrile rubber. Major manufacturers are IPCL and Haldia Petrochemicals.

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Acquisition of IPCL by Reliance

The production of petrochemicals began in India with the setting up of small plants in the late
1950s/early1960s using non-petroleum feedstock. LDPE was produced based on alcohol, PVC
from calcium carbide, and SBR & PS from coal based benzene.

In the late 1960s, National Organic Chemicals Ltd (NOCIL), then partly owned by Royal Dutch
Sell Group (stake sold in 1993), commissioned a small integrated naphtha cracker with ethylene
capacity of 70ktpa. It used ethylene for manufacture of EO, EG and PVC, and also supplied
ethylene to its subsidiary for the manufacture of HDPE.

In 1973 IPCL commissioned its first plant. Further developments are mentioned in the section
“IPCL – Govt. foray into petrochemicals”.

In 1992-93, Reliance Industries Ltd commissioned a 160 ktpa HDPE/LLDPE swing plant at
Hazira Gujarat. In 1996-97, Reliance expanded this plant and also set up PP facility as well as
a750 ktpa naphtha – based cracker at Hazira.

The Gas Authority of India Ltd (GAIL), a State-owned company commissioned a 400-ktpa-
ethylene gas based cracker at Auraiya, Uttar Pradesh, in early 1999. The downstream facilities
include LLDPE/HDPE. The plant has the distinction of being the first cracker outside Western
India, and is located away from the ports.

Haldia Petrochemicals Ltd is the latest to put up naphtha cracker with a capacity of 300 ktpa at
Haldia, West Bengal along with LLDPE, HDPE and PP facilities.

Capacities & Feedstock of crackers in India

Plant Ethylene Feedstock mix Supplier

Capacity arrangement
(000 MT)
IPCL, Baroda 130 Naphtha Purchased from IOC
and also imported
IPCL, Nagothane 400 Ethane Propane mix Purchased from
ONGC
IPCL,Gandhar 300 Ethane Propane mix Natural gas
purchased from GAIL
and separated in-
house and return
stream sold back. The
gas is received from
both adjoining
Gandhar field as also
Hazira
RIL, Hazira 750 Naphtha Purchased from group
refinery also located
in Gujarat
GAIL, Auraiya 300 Ethane Propane mix Separated from in-
house natural gas
(Purchased in bulk
from ONGC)
HPL, Haldia 420 Naphtha Naphtha sourced from
adjoining IOC Haldia
refinery and imports
in equal share

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Location of petrochemical units in India

Auraiya

Baroda

Haldia
Jamnagar

Gandhar

Hazira

Nagothane

Uses of Polymers

Product Uses
LDPE/LLDP Consumer packaging / film, extrusion wires, cable coatings
HDPE Fertilizers / household packaging, woven sacks, cartons, crates, luggage, pipes
PP BOPP film /cement packaging, monofilament yarn, ropes
PVC Water pipe, electrical conduit /wires, cables, sheets,
PBR Automotive tyres and tubes, conveyor belts, footwear

Prices of Polymers

The prices of polymers produced in the country are determined, to great extent, by the
landed costs of imported polymers. Indian prices have been aligned to landed costs of
imported products. There are small discounts/premium to landed costs, depending
upon demand/supply situation. However, in case of PVC the discount remained for 2
years from 1999-2001.

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Acquisition of IPCL by Reliance

International Prices ($)

Year HDPE LDPE PP PVC

1995 - 96 832 941 950 778

1996 - 97 816 910 814 723
1997 - 98 729 865 641 718
1998 - 99 494 598 456 477
1999 - 00 654 717 591 688
2000 - 01 656 730 605 655
2001 - 02 545 585 510 476

The landed costs have been affected by 2 factors, apart from the international prices. One has
been the import duty. Since 1991, the import duty on polymers, as most other products, has
been coming down. This factor, on its own, would have adversely affected the viability of local
manufacturers. However, depreciation of rupee against dollar – the second factor affecting the
landed costs – has been of great help to local producers. Although polymer prices in the
international markets are cyclical and have not shown any increase over their levels since 1980,
the domestic prices have risen on account of the substantial depreciation of rupee.

The current import duty of 30% is expected to go down till it settles at average South East Asian
level of around 10%. While historically rupee has only moved downward, in the recent past, due
to weakness of dollar, it has shown some appreciation.

Cyclicality in Petrochemical Industry

Like many basic commodities, petrochemicals also go through cyclicality

High demand
High margins & profits
High fresh investments
Capacity buildup

Up cycle Supply increasing

Demand increasing
Price rising Margins & profits declining
Profits increasing Fresh investment declining
Fresh investment picking up Down cycle Mergers & acquisition moderate
Mergers & acquisition low

Significant overcapacity
Low margins
Profits low to negative
Fresh investment low
Mergers & acquisition high

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Acquisition of IPCL by Reliance

Growth prospects for Indian petrochemicals industry

Worldwide the consumption of polymers worldwide shows two distinct phases. In the first phase,
there is a strong substitution of traditional materials and in the second, the substitution ceases,
and there is competition among plastics and its substitutes. In the first phase, in which India is,
the growth in the demand is much higher than that of GDP. In the second phase, the growth is in
line with GDP growth.

Growth Rates (%)

(1990 – 2001)

Polymer India World

LDPE 1.6 1.3
LLDPE 34.9 9.4
HDPE 14.8 5.7
PP 18.9 8.3
PVC 10.1 3.7

The accompanying table shows polymer consumption growth rates (%) during 1990-2001. With
the exception of LDPE, all other polymers have growth rates 2 – 4 times higher than that of the
world.
Since the absolute levels of consumption are so low in India, for many more years high growth
will continue.

Demand for polymers is also expected to increase in the coming years due to the concessions
given by the government to infrastructure industries like telecom, power and transportation
coupled with growth in consumer durables and packaging industries. The margins of the
domestic players are likely to increase due to an increase in global as well as the domestic
demand. The domestic elastomers industry is likely to continue in the same manner, although at
a lesser rate, due to the slowdown in its major end use segment, the tyre industry.

The per capita consumption in the country is very low when compared to global standards,
despite the high growth rate witnessed by the petrochemical industry in the recent years. This is
exemplified by the case of plastics, the per capita consumption of which was only 3.8 kilograms
in the country in the year 2001-2002 when compared to the global average of 19.7 kilograms.
The low consumption pattern indicates huge demand growth potential for the country.

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Acquisition of IPCL by Reliance

Reliance Industries Ltd.

Dhirubhani Ambani, who started trading in yarn, founded the company in 1958. Most notable was
his decision to backward integrate textiles manufacturing. Between 1982-1988, established
polyester manufacturing facilities at Patalganga. It started phase 1 of the Hazira Petrochemical
complex. By 1998, Reliance completed phase – 2 expansion of Hazira Petrochemical Complex
including world’s largest multifeed cracker with an investment of over Rs. 90 billion ($ 2.5 billion),
increasing capacity four fold to more than 6 million tonnes per annum. Reliance floated a
separate company – Reliance Petroleum (RPL). RPL is the first refinery to be set up by the
private sector in India, pursuant to oil sector reforms.

RPL is the world’s largest grassroots refinery, and the 7th largest refinery in the world at any
single site, with a capacity of 27 million tonnes per annum, at Jamnagar, in the state of Gujarat,
India. The RPL refinery has been set up at a capital outlay of Rs 142.5 billion (US$ 3.4 billion).

Reliance is the second largest producer of polyester in the world. It is now ranked amongst the
top 10 producers globally, in all its major products – the 3rd largest producer of paraxylene , the
4th largest producer of PTA, and the 6th largest producer of polypropylene in the world.

IPCL – Reliance combination - synergies and savings

Since this is a horizontal acquisition, synergies between RIL and IPCL would have an impact on
cash flows and valuation. There is potential for cost savings within IPCL, as a result of the
change in management. RIL itself will gain due to this acquisition.

Improvement of pricing power

Management control over IPCL will make RIL the clear number-one player in the Indian
petrochemicals market, with dominant market shares across key polymer segments, along with
dominant market shares in ethylene glycol and LAB.

Product Capacity (‘000 TPA) Combined Total Combined as % of

India Total

RIL IPCL

HDPE 400 380 780 1520 51.3

LDPE 160 160 184 87

PP 1000 190 1190 1415 84.1

PVC 270 205 475 770 61.7

MEG 360 170 530 580 91.4

LAB 100 45 145 320 45.3

With such market domination, it would be tempting for RIL – IPCL to improve their price
realization. However, since all the products are commodities, to what extent this will be possible
is a moot point.

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Acquisition of IPCL by Reliance

Feedstock
On the feedstock side, there may be few synergies. RIL has a naphtha-based cracker, while
IPCL’s Nagothane and Gandhar crackers are gas-based – feedstock comes from
ONGC. IPCL’s Baroda cracker, which is naphtha-based, has a feedstock linkage with
IOC’s Koyali refinery next door. RIL will be able to displace IOC for naphtha supply – it
exports naphtha from Jamnagar, and selling domestically will give it a 10% higher
realisation. That said, domestic transportation costs are likely to be a key factor that will weigh
against this switch.

RIL also has some scope to rationalise product logistics – its Patalganga complex (near
Mumbai) can source its MEG requirements from IPCL’s Nagothane unit, instead of moving it
from its Hazira unit.

Sales and distribution

The polymer market in India is fragmented – buyers are small and spread out across the country.
As a result, IPCL and RIL will have a significant overlap on sales and distribution costs. External
analysts think IPCL spends around Rs 519/ton of product; RIL, on the other hand, spends Rs
532/ton of external sales. The duplication of channel infrastructure can be reduced.
It is pertinent to remember here that the sharing of synergies between RIL and IPCL could be an
issue – IPCL is still a 33%-owned government company, with its own set of minority
shareholders. Realising the potential pool of synergies might get stuck on sharing issues.

Cost savings
IPCL has further scope for cost reductions in two key areas:
1) Manpower costs – Manpower costs are a key area of potential savings. IPCL has
13,740 employees, with a large proportion of the employees at its headquarters in
Baroda (about 8,000). On a per-ton basis, analysts believe IPCL’s manpower cost is 210% higher
than of RIL’s.
Manpower cost savings could generate substantial savings. To achieve them, upfront payment
for employee separation scheme of the order of Rs. 1.5 million per employee will be necessary.
Analyst believe that 50% cut in the staff is possible.
RIL has a track record of being highly cost conscious. But with the extra sensitivities involved
with the disinvestment process, it remains to be seen how quickly manpower rationalisation can
progress.
2) Overheads – IPCL’s overheads per ton of product at Rs1, 532/ton of production are
2.5x those of RIL. Within this cost pool, over 35% goes towards repairs and maintenance – a
reflection on the age of IPCL’s plants. Cutting repairs & maintenance overheads would involve
refurbishment of existing operations, which would require upfront capital investments.

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Acquisition of IPCL by Reliance

Gas prices: a wild card

Gas prices in India are currently pegged at 75% of the energy equivalent FOB price of fuel oil in
the international market, subject to a ceiling of Rs2,850 per thousand standard cubic metres. As
a result, current landfall prices of gas are 49% below what they should be, based on the formula
price linked to a 100% landfall price.
Before the bidding for IPCL was completed, ONGC and IPCL reached an agreement to peg the
price of ethane to the landfall price of gas, and that of propane to a weighted average of the
landfall price of gas (67%) and the international price of propane (33%).
In the past, the government has talked about raising the prices of natural gas in India, first
removing the ceiling and then moving to a 100% linkage to the energy equivalent price of fuel
oil. This would squeeze IPCL’s profitability.
Clearly, managing the gas-pricing policy can yield a better-than-expected outcome for
RIL. Raising gas prices has a political cost – more than 62% of gas in India is used for fertilisers
and power. The resulting cost-push would result in higher fertiliser prices and higher power costs
– both have an associated political cost, and the government’s will is likely to be tested.

Financial Analysis & Valuation of IPCL

Dr. Hikaf collected financial information as follows:

Exhibit 1 Balance sheet for last 6 years of IPCL

Exhibit 2 Profit & loss statement for last 6 years of IPCL
Exhibit 3 Sales mix of IPCL
Exhibit 4 Projected income statement of IPCL
Exhibit 5 Balance Sheet for last 6 years of Reliance
Exhibit 6 Profit & loss statement for last 6 years of Reliance
Exhibit 7 Stock prices 0f IPCL for last 5 years
Exhibit 8 Cost of capital calculation of IPCL & RIL

The assumptions for the explicit horizon period, underlying the projected income statements,
were based on the past performance of IPCL.
The gross sales are expected to grow at 8% p.a. Other income is expected to be 3% of gross
sales.
Raw materials will be 30.28% of gross sales, stores, chemicals & packing materials 4.54%, other
manufacturing expenses 19.09%, employee costs 7.23%, establishment expense 2.79% and
selling & distribution expenses 3.21%.

Depreciation amount is worked out on the basis of average of past depreciation over the average
of past fixed assets. It is kept constant over the years. Capital expenditure is considered at the
same level as the depreciation.

Since current effective tax rate is 10% of profit before tax, this is assumed to continue. However,
for the cash flows for the continuity value, corporate tax rate is calculated at 35% - the current
tax rate.

Net working capital is assumed at 30% of gross sales.

The cash flows have been discounted at 10%, since the cost of capital of both IPCL and

Reliance is around 10% as shown in Exhibit 8

The present value of IPCL turns out to be Rs. 277/share – higher than what Reliance paid for
IPCL. This value does not take into account possibilities of synergies between Reliance and
IPCL
Dr. Hikaf was convinced that Reliance paid a reasonable price.
Are you convinced?

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 Acquisition of IPCL by Reliance

Exhibit 1 IPCL: Balance Sheet

(Rs. millions)

31.3.1997 31.3.1998 31.3.1999 31.3.2000 31.3.2001 31.3.2002

SOURCES OF FUNDS

Shareholders' Funds

Share Capital(FV=Rs 10) 2490 2491 2491 2491 2491 2491

Reserves and surplus 26443 27792 27813 27835 29461 25782
Shareholders' Funds 28933 30283 30303 30326 31952 28273
Loan Funds
Secured loans 14130 16511 16792 14483 9941 6915
Unsecured loans 18799 26865 29726 32978 32817 30248
Loan Funds 32929 43375 46517 47461 42757 37163
Leased assets liabilities 0 0 0 0 0 4853
Net Deferred tax Liabilities 0 0 0 0 0 1884
Total Liabilities 61862 73658 76821 77787 74709 72173

APPLICATION OF FUNDS
Fixed Assets
Gross block 52751 55701 60548 85834 87567 89095
Less : Depreciation 14656 17028 19747 22852 26983 31262
Net block 38095 38673 40801 62981 60584 57833
Capital work-in-progress 5407 14520 20506 1305 859 850
Fixed Assets-Total 43503 53193 61307 64286 61443 58683
Assets taken on lease 0 0 0 4989
Capital work-in-progress 0 0 0
Total 43503 53193 61307 64286 61443 63672
Investments 255 297 697 741 1091 1121
Interest Acc. On
Investments 0 0 0 0 0 0
Inventories 4883 6700 6614 7780 8726 6998
Sundry debtors 3822 4633 3850 4286 3631 3210
Cash and bank balances 9715 8364 3958 3874 2889 2340
Loans and advances 10924 15104 13087 11238 10075 4842
Other Current Assets 0 0 0 0 0 0
Current Assets-Total 29345 34801 27509 27178 25321 17389
Less:
Curr.Liabilities 5680 8836 7652 8991 6996 9370
Provisions 6270 6485 5713 6144 6718 987
11950 15321 13364 15135 13715 10358
Net Current Assets 17395 19480 14145 12044 11607 7032
(4) Miscellaneous Exp 709 689 673 716 568 348
Total 61862 73658 76821 77787 74709 72173
Market Price 138.25 69.55 110.5 60.7 54.05 83.5

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Exhibit 2 IPCL: Profit & Loss Statement

(Rs.millions)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
INCOME
Gross Sales 34296 36916 38498 49198 58625 55324
Less: Excise duty 6561 7208 7522 9324 8307 7574
Net Sales 27735 29708 30976 39874 50318 47750
Other income 778 1120 795 1121 1677 1642
Change in stocks -10 1561 334 562 760 -1928
Total 28502 32389 32105 41557 52756 47464
EXPENDITURE
Raw Materials Consumed 8130 10415 10447 16052 18899 18682
Purchase for Resale 5 12 17 266 417 54
Stores,chemicals & packing
materials 1816 2082 2069 2388 2180 1846
Other manufacturing expenses 5505 7847 7708 8490 11669 10858
Employees costs 2329 2725 3090 3178 4392 4015
Establishment expenses 854 1268 1950 959 1342 1237
Selling and distribution
expenses 968 1163 1480 1686 1738 1713
Deferred revenue expense
written off 23 118 146 284 322 380
Interest 2994 4143 5156 5146 4909 3737
Depreciation 1522 2374 2704 3190 4149 4244
Total 24147 32147 34765 41637 50016 46766
Less : Transfer to Capital
Expenditure 1564 2370 3058 2072 1 2
Total 22583 29777 31707 39565 50015 46765
Profit before prior period
items & taxation 5920 2612 398 1992 2740 699
Prior Period Items 11 111 -69 -21 -19 408
Profit before Tax 5931 2723 329 1971 2721 1107
Provision for Income-Tax 829 287 35 83 231 -56
Provision for Deferred Tax 0 0 0 0 0 88
Profit after Tax 5101 2436 294 1888 2490 1075
AMOUNT AVAILABLE FOR
APPROPRIATION 18295 18297 16741 18528 18669 19225
Dividends 1092 1092 248 606 821 496
Balance Carried to Balance
Sheet 15828 16181 15282 15630 16998 18079

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Acquisition of IPCL by Reliance

Exhibit 3 Sales mix of IPCL

Year ending March 1999 2000 2001 2002 2003

1.LDPE/LLDPE

Tonnes 222,619 269,151 296,635 287,315 267,148

Rupees million 7,684 10,900 12,403 10,640 10,132

2.HDPE

Tonnes 91,723 144,346 190,960 219,059 238,268

Rupees million 2,743 5,049 7,049 7,490 7,792

3.PVC

Tonnes 208,868 180,434 221,119 228,820 202,104

Rupees million 5,148 6,227 8,141 7,526 7,789

4.Polypropylene

Tonnes 164,250 170,102 182,666 193,336 183,993

Rupees million 4,645 5,724 6,715 6,645 7,122

5.Polybutadiene Rubber

Tonnes 39,368 43,041 35,307 45,316 53,435

Rupees million 1,530 1,769 1,837 2,116 2,508

6.Acrylic Fibre

Tonnes 17,609 16,353 15,084 17,866 18,981

Rupees million 1,067 932 1,117 1,098 1,374

7.MEG

Tonnes 57,220 84,999 154,691 178,273 187,842

Rupees million 1,159 2,452 4,047 3,655 5,085

8.LAB

Tonnes 52,540 52,834 51, 075 56,130 54,029

Rupees million 2,178 2,374 2,498 2,738 2,330

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Acquisition of IPCL by Reliance

Exhibit 4 IPCL - Projected Income & cash flow statement (Rs.millions)

Continuity
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Value
INCOME
Gross Sales 59750 64530 69692 75268 81289 87792 94816 94816
Less: Excise duty (VAT) 8365 9034 9757 10537 11380 12291 13274 13274
Net Sales 51385 55496 59935 64730 69909 75501 81541 81541
Other income 1562 1687 1822 1968 2125 2295 2479 2479
Total 52947 57183 61757 66698 72034 77796 84020 84020
EXPENDITURE
Raw Materials Consumed 18093 19540 21104 22792 24615 26584 28711 28711
Purchase for Resale 169 182 197 213 230 248 268 268
Stores, chemicals & packing materials 2711 2928 3162 3415 3688 3983 4302 4302
Other manufacturing expenses 11404 12316 13301 14365 15515 16756 18096 18096
Employees costs 4320 4666 5039 5442 5878 6348 6856 6856
Establishment expenses 1666 1800 1944 2099 2267 2449 2644 2644
Selling and distribution expenses 1915 2069 2234 2413 2606 2814 3040 3040
Deferred revenue expense written off 279 301 325 351 379 410 443 443
Depreciation 3754 3754 3754 3754 3754 3754 3754 3754

Profit before Tax 8635 9626 10697 11853 13101 14450 15906 15906
Provision for Income-Tax 824 918 1021 1131 1250 1379 1518 5567
Provision for Deferred Tax
Profit after Tax 7811 8708 9676 10722 11851 13071 14388 10339

Free Cash Flow 11565 12462 13430 14476 15605 16825 18143 14093
Capital expenditure 3754 3754 3754 3754 3754 3754 3754 3754
Net Working Capital (NWC) 17891 19322 20868 22537 24340 26288 28391 28391
Change in NWC 4274 1431 1546 1669 1803 1947 2103 2935
Cash Flow 3537 7276 8130 9052 10048 11124 12285 7404
Cost of capital 10.00%
Continuity Value 128335

PV of Firm 106199
Value of Debt 37163
PV of Equity 69036
Number of Shares 249
Share Price 277

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Exhibit 5 Reliance: Balance Sheet

(Rs.
millions)
31.3.1997 31.3.1998 31.3.1999 31.3.2000 31.3.2001 31.3.2002
SOURCES OF FUNDS
Shareholders' Funds

Share Capital(FV=Rs 10) 4585 11198 11863 13465 10535 13960

Reserves and surplus 80125 111628 111830 126364 137119 264794
Shareholders Funds 84710 122826 123693 139829 147654 278754

Loan Funds
Secured loans 42468 27368 64427 59881 40684 141889
Unsecured loans 33787 55106 52077 55321 60674 47396
Loan Funds 76255 82474 116504 115202 101358 189285
Leased assets liabilities 0 0 0 0 0 20607
Net Deferred tax
Liabilities 0 0 0 0 0 0
Total 160965 205300 240197 255031 249012 488646

APPLICATION OF
FUNDS

Fixed Assets
Gross block 109559 178483 186503 243309 253560 467273
Less : Depreciation 34912 49444 66919 92141 118415 150769
Net block 74647 129039 119584 151168 135145 316504
Capital work-in-progress 37086 20694 34378 3314 5123 15333
Fixed Assets-Total 111733 149733 153962 154482 140268 331837
Assets taken on lease 0 0 0 0 0
Capital work-in-progress
Total 111733 149733 153962 154482 140268 331837
Investments 44557 42823 42946 60666 67261 38502
Interest Acc. On
Investments 603 211 256 475 851
Inventories 10854 13440 14086 18232 22998 49741
Sundry debtors 6014 6427 4571 8425 11342 27225
Cash and bank balances 8638 21335 48976 10816 1006 17607
Loans and advances 12963 9911 16763 40593 55027 95653
Other Current Assets 0 0 0 0 91225 4281
Current Assets-Total 39072 51324 84652 78541 182449 194507
Less:
Curr.Liabilities 30875 33820 35919 36000 41108 64723
Provisions 3522 4760 5444 2658 8634 12105
34397 38580 41363 38658 49742 76828
Net Current Assets 4675 12744 43289 39883 41483 117678
(4) Miscellaneous Exp 0 0 0 629
Total 160965 205300 240197 255031 249012 488646

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Acquisition of IPCL by Reliance

Exhibit 6 Reliance: Profit & Loss statement

(Rs. millions)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
INCOME
Gross Sales 87303 134038 145533 203014 280082 571195.7
Less: Excise duty 12839 18931 19295 24515 25789 33150
Net Sales 74464 115107 126238 178499 254293 538046
Other income 2896 3356 6076 6873 3826 7823
Change in stocks -953 3683 -1524 3437 3179 -9078
Total 76407 122146 130790 188809 261298 536791
EXPENDITURE
Raw Materials Consumed 19322 36464 32109 66424 94301 264894
Purchase for Resale 152 142 1901 4860 29356 16978
Stores,chemicals & packing materials 3576 6396 8266 0 8061 11204
Other manufacturing expenses 5273 5249 4769 12467 6327 11877
Employees costs 2381 3099 3583 3748 4411 5694
Establishment expenses 2020 2732 4792 5536 5766 4561
Selling and distribution expenses 1319 2352 2904 3764 7618 13727
Deferred revenue expense written off 0 0 0 0 0
Interest 1700 5036 7288 10080 12160 18251
Depreciation 4101 6673 8550 12784 15651 28161
Inter -Divisional Transfers 22887 36846 39291 44542 49841 117157
Less : Transfer to Capital Expenditure 0 0 0 0 0
Total 62731 104989 113453 164205 233492 492504
Profit before prior period items &
taxation 13676 17157 17337 24604 27806 44287
Prior Period Items 0 0 0 0 0 0
Profit before Tax 13676 17157 17337 24604 27806 44287
Provision for Income-Tax 450 630 300 570 1350 1900
Provision for Deferred Tax 0 0 0 0 0 9960
Profit after Tax 13226 16527 17037 24034 26456 32427
AMOUNT AVAILABLE FOR
APPROPRIATION 14100 22658 27516 37980 43951 55321
Dividends 2992 3904 3734.5 3847 4478 6633
Balance Carried to Balance Sheet 6628 10479 11327 17395 21606 27262

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Acquisition of IPCL by Reliance

Exhibit 7 IPCL: Stock Prices

Months Stock price(Rs) Months Stock price(Rs)

April 1997 142 January 2000 108
May 1997 130 February 2000 93
June 1997 132 March 2000 69
July 1997 141 April 2000 55
August 1997 130 May 2000 51
September 1997 117 June 2000 60
October 1997 110 July 2000 59
November 1997 86 August 2000 61
December 1997 68 September 2000 60
January 1998 97 October 2000 52
February 1998 57 November 2000 56
March 1998 65 December 2000 63
April 1998 75 January 2001 70
May 1998 76 February 2001 75
June 1998 59 March 2001 63
July 1998 49 April 2001 53
August 1998 46 May 2001 57
September 1998 54 June 2001 56
October 1998 58 July 2001 48
November 1998 61 August 2001 44
December 1998 54 September 2001 39
January 1999 79 October 2001 40
February 1999 77 November 2001 48
March 1999 109 December 2001 55
April 1999 97 January 2002 58
May 1999 100 February 2002 73
June 1999 106 March 2002 84
July 1999 113
August 1999 125
September 1999 133
October 1999 125
November 1999 114
December 1999 116

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Acquisition of IPCL by Reliance

Exhibit 8

Cost of Capital
RIL IPCL

Debt (Rs million) 189285 37163

Interest Payment (Rs million) 18251 3737
Cost of Debt 6.27% 6.54%
Weightage of Debt 31.08% 64.12%

Beta 0.66 0.86

Risk-free Interest Rate 7.50% 7.50%
Equity Risk Premium 8.50% 8.50%
Cost of Equity 13.11% 14.81%
Market Price of Share (Rs) 300.7 83.5
Number of Shares (million) 1396 249.05
Market Capitalization (Rs million) 419777 20796
Weightage of Equity 68.92% 35.88%

Enterprise Value (Rs million) 609062 57959

WACC 10.98% 9.50%

Page 18