Acquisition S. M.

Fakih of IPCL by Reliance

29 December 2006

th

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 231 131 110

Reliance Industries Ltd (RIL) Indian Oil Corp (IOC) Nirma

The bid price was at a 74% premium to IPCLs 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 Reliances 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.
Page 1

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.

Page 2

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.

Page 3

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-ktpaethylene 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 Capacity (000 MT) 130 400 300 Feedstock mix Supplier arrangement
Purchased from IOC and also imported Purchased from ONGC Natural gas purchased from GAIL and separated inhouse and return stream sold back. The gas is received from both adjoining Gandhar field as also Hazira Purchased from group refinery also located in Gujarat Separated from inhouse natural gas (Purchased in bulk from ONGC) Naphtha sourced from adjoining IOC Haldia refinery and imports in equal share

IPCL, Baroda IPCL, Nagothane

Naphtha Ethane Propane mix Ethane Propane mix

IPCL,Gandhar

RIL, Hazira

750 300

Naphtha

GAIL, Auraiya

Ethane Propane mix

HPL, Haldia

420

Naphtha

Page 4

Acquisition of IPCL by Reliance

Location of petrochemical units in India

Auraiya

Baroda Haldia Jamnagar Gandhar Hazira Nagothane

Uses of Polymers Product LDPE/LLDP HDPE PP PVC PBR Uses Consumer packaging / film, extrusion wires, cable coatings Fertilizers / household packaging, woven sacks, cartons, crates, luggage, pipes BOPP film /cement packaging, monofilament yarn, ropes Water pipe, electrical conduit /wires, cables, sheets, 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.

Page 5

Acquisition of IPCL by Reliance

International Prices ($)

Year 1995 - 96 1996 - 97 1997 - 98 1998 - 99 1999 - 00 2000 - 01 2001 - 02 HDPE 832 816 729 494 654 656 545 LDPE 941 910 865 598 717 730 585 PP 950 814 641 456 591 605 510 PVC 778 723 718 477 688 655 476

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

Demand increasing Price rising Profits increasing Fresh investment picking up Mergers & acquisition low

Up cycle

Down cycle

Supply increasing Margins & profits declining Fresh investment declining Mergers & acquisition moderate

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

Page 6

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 LDPE LLDPE HDPE PP PVC India 1.6 34.9 14.8 18.9 10.1 World 1.3 9.4 5.7 8.3 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.

Page 7

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 worlds 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 worlds 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) RIL IPCL 380 160 1000 270 360 100 190 205 170 45

Combined

Total India

Combined as % of Total

HDPE LDPE PP PVC MEG LAB

400

780 160 1190 475 530 145

1520 184 1415 770 580 320

51.3 87 84.1 61.7 91.4 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.
Page 8

Acquisition of IPCL by Reliance

Feedstock
On the feedstock side, there may be few synergies. RIL has a naphtha-based cracker, while IPCLs Nagothane and Gandhar crackers are gas-based feedstock comes from ONGC. IPCLs Baroda cracker, which is naphtha-based, has a feedstock linkage with IOCs 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 IPCLs 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 IPCLs manpower cost is 210% higher than of RILs. 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 IPCLs 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 IPCLs plants. Cutting repairs & maintenance overheads would involve refurbishment of existing operations, which would require upfront capital investments.

Page 9

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 IPCLs 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 governments will is likely to be tested. Financial Analysis & Valuation of IPCL Dr. Hikaf collected financial information as follows: Exhibit 1 Exhibit 2 Exhibit 3 Exhibit 4 Exhibit 5 Exhibit 6 Exhibit 7 Exhibit 8 Balance sheet for last 6 years of IPCL Profit & loss statement for last 6 years of IPCL Sales mix of IPCL Projected income statement of IPCL Balance Sheet for last 6 years of Reliance Profit & loss statement for last 6 years of Reliance Stock prices 0f IPCL for last 5 years 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?

Page 10

Acquisition of IPCL by Reliance Exhibit 1

(Rs. millions) 31.3.1997 SOURCES OF FUNDS Shareholders' Funds Share Capital(FV=Rs 10) Reserves and surplus Shareholders' Funds Loan Funds Secured loans Unsecured loans Loan Funds Leased assets liabilities Net Deferred tax Liabilities Total Liabilities APPLICATION OF FUNDS Fixed Assets Gross block Less : Depreciation Net block Capital work-in-progress Fixed Assets-Total Assets taken on lease Capital work-in-progress Total Investments Interest Acc. On Investments Inventories Sundry debtors Cash and bank balances Loans and advances Other Current Assets Current Assets-Total Less: Curr.Liabilities Provisions Net Current Assets (4) Miscellaneous Exp Total 2490 26443 28933 14130 18799 32929 0 0 61862 2491 27792 30283 16511 26865 43375 0 0 73658 2491 27813 30303 16792 29726 46517 0 0 76821 2491 27835 30326 14483 32978 47461 0 0 77787 2491 29461 31952 9941 32817 42757 0 0 74709 2491 25782 28273 6915 30248 37163 4853 1884 72173 31.3.1998 31.3.1999 31.3.2000 31.3.2001 31.3.2002

IPCL: Balance Sheet

52751 14656 38095 5407 43503 0 0 43503 255 0 4883 3822 9715 10924 0 29345 5680 6270 11950 17395 709 61862

55701 17028 38673 14520 53193 0 0 53193 297 0 6700 4633 8364 15104 0 34801 8836 6485 15321 19480 689 73658

60548 19747 40801 20506 61307 0 0 61307 697 0 6614 3850 3958 13087 0 27509 7652 5713 13364 14145 673 76821

85834 22852 62981 1305 64286

87567 26983 60584 859 61443

89095 31262 57833 850 58683 4989 63672 1121 0 6998 3210 2340 4842 0 17389 9370 987 10358 7032 348 72173

64286 741 0 7780 4286 3874 11238 0 27178 8991 6144 15135 12044 716 77787

61443 1091 0 8726 3631 2889 10075 0 25321 6996 6718 13715 11607 568 74709

Market Price

138.25

69.55

110.5

60.7

54.05

83.5

Page 11

Acquisition of IPCL by Reliance Exhibit 2 IPCL: Profit & Loss Statement

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

Page 12

Acquisition of IPCL by Reliance Exhibit 3 Sales mix of IPCL

Year ending March

1.LDPE/LLDPE Tonnes Rupees million 2.HDPE Tonnes Rupees million 3.PVC Tonnes Rupees million 4.Polypropylene Tonnes Rupees million 5.Polybutadiene Rubber Tonnes Rupees million 6.Acrylic Fibre Tonnes Rupees million 7.MEG Tonnes Rupees million 8.LAB Tonnes Rupees million

1999
222,619 7,684

2000
269,151 10,900

2001
296,635 12,403

2002
287,315 10,640

2003
267,148 10,132

91,723 2,743

144,346 5,049

190,960 7,049

219,059 7,490

238,268 7,792

208,868 5,148

180,434 6,227

221,119 8,141

228,820 7,526

202,104 7,789

164,250 4,645

170,102 5,724

182,666 6,715

193,336 6,645

183,993 7,122

39,368 1,530

43,041 1,769

35,307 1,837

45,316 2,116

53,435 2,508

17,609 1,067

16,353 932

15,084 1,117

17,866 1,098

18,981 1,374

57,220 1,159

84,999 2,452

154,691 4,047

178,273 3,655

187,842 5,085

52,540 2,178

52,834 2,374

51, 075 2,498

56,130 2,738

54,029 2,330

Page 13

Acquisition of IPCL by Reliance

Exhibit 4
INCOME Gross Sales Less: Excise duty (VAT) Net Sales Other income Total EXPENDITURE Raw Materials Consumed Purchase for Resale Stores, chemicals & packing materials Other manufacturing expenses Employees costs Establishment expenses Selling and distribution expenses Deferred revenue expense written off Depreciation Profit before Tax Provision for Income-Tax Provision for Deferred Tax Profit after Tax Free Cash Flow Capital expenditure Net Working Capital (NWC) Change in NWC Cash Flow Cost of capital Continuity Value PV of Firm Value of Debt PV of Equity Number of Shares Share Price

IPCL - Projected Income & cash flow statement

2002-03
59750 8365 51385 1562 52947 18093 169 2711 11404 4320 1666 1915 279 3754 8635 824 7811 11565 3754 17891 4274 3537 10.00% 128335 106199 37163 69036 249 277

(Rs.millions)
2007-08
87792 12291 75501 2295 77796 26584 248 3983 16756 6348 2449 2814 410 3754 14450 1379 13071 16825 3754 26288 1947 11124

2003-04
64530 9034 55496 1687 57183 19540 182 2928 12316 4666 1800 2069 301 3754 9626 918 8708 12462 3754 19322 1431 7276

2004-05
69692 9757 59935 1822 61757 21104 197 3162 13301 5039 1944 2234 325 3754 10697 1021 9676 13430 3754 20868 1546 8130

2005-06
75268 10537 64730 1968 66698 22792 213 3415 14365 5442 2099 2413 351 3754 11853 1131 10722 14476 3754 22537 1669 9052

2006-07
81289 11380 69909 2125 72034 24615 230 3688 15515 5878 2267 2606 379 3754 13101 1250 11851 15605 3754 24340 1803 10048

2008-09
94816 13274 81541 2479 84020 28711 268 4302 18096 6856 2644 3040 443 3754 15906 1518 14388 18143 3754 28391 2103 12285

Continuity Value
94816 13274 81541 2479 84020 28711 268 4302 18096 6856 2644 3040 443 3754 15906 5567 10339 14093 3754 28391 2935 7404

Page 14

Acquisition of IPCL by Reliance Exhibit 5 Reliance: Balance Sheet

31.3.1997 SOURCES OF FUNDS Shareholders' Funds Share Capital(FV=Rs 10) Reserves and surplus Shareholders Funds Loan Funds Secured loans Unsecured loans Loan Funds Leased assets liabilities Net Deferred tax Liabilities Total APPLICATION OF FUNDS Fixed Assets Gross block Less : Depreciation Net block Capital work-in-progress Fixed Assets-Total Assets taken on lease Capital work-in-progress Total Investments Interest Acc. On Investments Inventories Sundry debtors Cash and bank balances Loans and advances Other Current Assets Current Assets-Total Less: Curr.Liabilities Provisions Net Current Assets (4) Miscellaneous Exp Total 4585 80125 84710

31.3.1998

31.3.1999

31.3.2000

31.3.2001

(Rs. millions) 31.3.2002

11198 111628 122826

11863 111830 123693

13465 126364 139829

10535 137119 147654

13960 264794 278754

42468 33787 76255 0 0 160965

27368 55106 82474 0 0 205300

64427 52077 116504 0 0 240197

59881 55321 115202 0 0 255031

40684 60674 101358 0 0 249012

141889 47396 189285 20607 0 488646

109559 34912 74647 37086 111733 0 111733 44557 603 10854 6014 8638 12963 0 39072 30875 3522 34397 4675 0 160965

178483 49444 129039 20694 149733 0 149733 42823 211 13440 6427 21335 9911 0 51324 33820 4760 38580 12744 0 205300

186503 66919 119584 34378 153962 0 153962 42946 256 14086 4571 48976 16763 0 84652 35919 5444 41363 43289 0 240197

243309 92141 151168 3314 154482 0 154482 60666 475 18232 8425 10816 40593 0 78541 36000 2658 38658 39883 255031

253560 118415 135145 5123 140268

467273 150769 316504 15333 331837 0 331837 38502

140268 67261 851 22998 11342 1006 55027 91225 182449 41108 8634 49742 41483 249012

49741 27225 17607 95653 4281 194507 64723 12105 76828 117678 629 488646

Page 15

Acquisition of IPCL by Reliance

Exhibit 6

Reliance: Profit & Loss statement

(Rs. millions) 2001-02 571195.7 33150 538046 7823 -9078 536791 264894 16978 11204 11877 5694 4561 13727 0 18251 28161 117157 0 492504 44287 0 44287 1900 9960 32427 55321 6633 27262

1996-97 INCOME Gross Sales Less: Excise duty Net Sales Other income Change in stocks Total EXPENDITURE Raw Materials Consumed Purchase for Resale Stores,chemicals & packing materials Other manufacturing expenses Employees costs Establishment expenses Selling and distribution expenses Deferred revenue expense written off Interest Depreciation Inter -Divisional Transfers Less : Transfer to Capital Expenditure Total Profit before prior period items & taxation Prior Period Items Profit before Tax Provision for Income-Tax Provision for Deferred Tax Profit after Tax AMOUNT AVAILABLE FOR APPROPRIATION Dividends Balance Carried to Balance Sheet 87303 12839 74464 2896 -953 76407 19322 152 3576 5273 2381 2020 1319 0 1700 4101 22887 0 62731 13676 0 13676 450 0 13226 14100 2992 6628

1997-98 134038 18931 115107 3356 3683 122146 36464 142 6396 5249 3099 2732 2352 0 5036 6673 36846 0 104989 17157 0 17157 630 0 16527 22658 3904 10479

1998-99 145533 19295 126238 6076 -1524 130790 32109 1901 8266 4769 3583 4792 2904 0 7288 8550 39291 0 113453 17337 0 17337 300 0 17037 27516 3734.5 11327

1999-00

2000-01 280082 25789 254293 3826 3179 261298 94301 29356 8061 6327 4411 5766 7618 12160 15651 49841 233492 27806 0 27806 1350 0 26456 43951 4478 21606

203014
24515 178499 6873 3437 188809 66424 4860 0 12467 3748 5536 3764

0
10080 12784 44542 0 164205 24604 0 24604 570 0 24034

37980
3847

17395

Page 16

Acquisition of IPCL by Reliance Exhibit 7 IPCL: Stock Prices

Months
April 1997 May 1997 June 1997 July 1997 August 1997 September 1997 October 1997 November 1997 December 1997 January 1998 February 1998 March 1998 April 1998 May 1998 June 1998 July 1998 August 1998 September 1998 October 1998 November 1998 December 1998 January 1999 February 1999 March 1999 April 1999 May 1999 June 1999 July 1999 August 1999 September 1999 October 1999 November 1999 December 1999

Stock price(Rs)
142 130 132 141 130 117 110 86 68 97 57 65 75 76 59 49 46 54 58 61 54 79 77 109 97 100 106 113 125 133 125 114 116

Months
January 2000 February 2000 March 2000 April 2000 May 2000 June 2000 July 2000 August 2000 September 2000 October 2000 November 2000 December 2000 January 2001 February 2001 March 2001 April 2001 May 2001 June 2001 July 2001 August 2001 September 2001 October 2001 November 2001 December 2001 January 2002 February 2002 March 2002

Stock price(Rs)
108 93 69 55 51 60 59 61 60 52 56 63 70 75 63 53 57 56 48 44 39 40 48 55 58 73 84

Page 17

Acquisition of IPCL by Reliance

Exhibit 8

Cost of Capital
RIL Debt (Rs million) Interest Payment (Rs million) Cost of Debt Weightage of Debt Beta Risk-free Interest Rate Equity Risk Premium Cost of Equity Market Price of Share (Rs) Number of Shares (million) Market Capitalization (Rs million) Weightage of Equity Enterprise Value (Rs million) WACC 189285 18251 6.27% 31.08% 0.66 7.50% 8.50% 13.11% 300.7 1396 419777 68.92% 609062 10.98% IPCL 37163 3737 6.54% 64.12% 0.86 7.50% 8.50% 14.81% 83.5 249.05 20796 35.88% 57959 9.50%

Page 18