Reliance beats IOC bonds as govt fights inflation
New Delhi   03-Feb-2011

Reliance Industries is providing bondholders with bigger returns than state-controlled IndianOil as the government fights the fastest inflation rate in at least six years.

The yield premium on Reliance’s 10.375% dollar notes due in June 2016 to IndianOil’s 4.75% bonds maturing in January 2015 has narrowed to 65 basis points, or 0.65 percentage point, from 227 on August 20 as Brent crude oil rose 37% to $101.40 a barrel in London trading. Investors say the gap will diminish after the government gave state refiners less cash as compensation than they sought on January 31 to make good revenue losses from below-cost fuel sales.

RIL has the advantage as it can export fuels from its two Jamnagar refineries, the world’s largest in a single location, while Serangulam V. Narasimhan, who became chairman of New Delhi-based IndianOil on Tuesday, faces curbs as the government struggles to tame the second-fastest inflation rate among the Group of 20 nations. India’s benchmark 10-year bond yield rose 26 basis points this year to 8.18%, the highest among major Asian economies after Indonesia.

“Higher oil prices hit IndianOil harder than Reliance and that will be reflected in narrowing spread on their bond yields,” said K Ravichandran, a Chennai-based oil and gas credit analyst at Icra, a local affiliate of Moody’s Investors Service. “IndianOil’s creditworthiness will become a concern as oil continues to rise. Their borrowings are continuously increasing.”

IndianOil, the nation’s biggest refiner that sells more than 50% of the fuels the country consumes, and other state refiners can’t raise prices of diesel, cooking gas and kerosene to keep the fuels affordable. Benchmark monthly inflation in India averaged 9.4%in 2010, the most since at least 2005. The finance ministry agreed on January 31 to give Rs 8,000 crore as compensation to the refiners for the last quarter, 20% less than the oil ministry demanded.

IndianOil’s borrowings climbed to Rs 540 00 crore from Rs 45000 crore as of April 1, Narasimhan said January 18. The refiner borrowed $500 million in a five-year loan on Dec. 24, according to data compiled by Bloomberg.

The yield on IndianOil’s note maturing in January 2015 has risen 38 basis points to 3.71% since the end of August, while the yield on the Reliance bond has slid 77 points to 4.36%, Bloomberg data show. Moody’s has a Baa3 rating on IndianOil’s debt, the lowest investment grade. The agency has a Baa2 rating on Reliance, the second-lowest investment grade.

Exports from Reliance’s combined 62 million metric tonne a year refineries increased 21% to 28.6 million tonne in the nine months ended December 31. That’s about 59% of total fuel sales, up from 56.7% a year earlier.