Thursday, October 20, 2016

Reliance Industries - Investment Research Report

A Brief Company Analysis Report for Investing in It's Shares

Basic Filtering Criteria:



(Rs. One Crores [10 million])
Minimum Required

Actual
(Year ending 31st March 2016)

1
Turnover
1000
2,84,790

2
Market Capitalization
1000
3,49,671
3
Price to Earnings Ratio
Less than 15
(Ideal 10)
11.27

4
Price to Book Value (P2BV) Ratio
Less than 1.5
3.08*
5
Dividend Yield
4-5%
0.97%

Note:
  1. PE Ratio:  Even though Benjamin Graham permits PE Ratio below 15, we believe in India below 10 is ideal and exceptions can be made in rare cases. In the case Reliance, considering its size, integrated operations, etc. the exception is justified.
  2. P2BV:  We compute book value after deducting intangible assets from the net worth. Reliance’s business model involves creation of significant intangible assets by way license fees for oil blocks, etc. Again an exception may be made based on the nature of business, and after making the exception the P2BV ratio comes down to an accepted level of 1.28.

Conclusion:
Considering the two negative results out of five filtering criteria, we cautiously decide to study one year’s financial statements for the financial year ending on 31st March 2016. We also would like to make comparison with our most favorite benchmark share, NMDC for this one year, limited study.



A. Company Performance

I. Profitability Analysis

We are in possession and have analyzed company’s financial statements for 12 years. Owing to space constraint we present here in this brief company report five-year data as follows:

(Rs. Crore/ Rs. 10 million)
Reliance Industries
(Year ending 31st March 2016)
NMDC Ltd.
(Year ending 31st March 2015)
Net Sales
2,76,544
12,356.41
All expenses other than finance cost, depreciation
2,32,287

4,578.06

EBDITA (Operating Profits)
44,257

7778.35
EBDITA (Operating Profits) %
16.00%

62.95%
Depreciation
12,916

 162.23
EBITA
 31,341
7616.12
EBITA %
11.33%
61.64%
Interest
3,608

0.00
Interest Cost to Sales - %
1.30%

0.00%
EBT
 27,733
7616.12
EBT %
10.03%
61.64%
Net Non-Operating Income
 8,246
2152.39
FINAL PBT
 35,979
9768.51
FINAL PBT %
13.01%
79.06%
Income Tax
 8,264
3346.21
PAT
 27,715
6422.30
PAT %
10.02%
51.98%

Highlights:
  1. Even though the operating margins of Reliance are humble compared to NMDC Ltd., considering the gigantic scale of operations lower margin can be accepted.
  2. Compared to zero interest costs of NMDC, Reliance has considerable interest burden amounting to 1.30% of net sales which is not a very comfortable for a value investor.

Conclusion:
Despite lower margins and sizable interest burden, on the parameter the company’s performance Reliance can be accepted and proceeded for further scrutiny.

 II. Balance Sheet Analysis


Balance Sheet Snapshot

(Rs. Crore/ Rs. 10 million)
Reliance Industries
(Year ending 31st March 2016)
NMDC Ltd.
(Year ending 31st March 2015)
Short term borrowings
23,954
0
Other current liabilities
1,61,916
1,989
Total current Liabilities
1,85,870
1,989
Total term liabilities
1,76,693

149
Total outside liabilities (TOL)
3,62,563
2,138
Net Worth
2,43,651
32,332
Total Liabilities
6,06,214
34,470
Current Assets
1,26,587
23890
Total Fixed Assets (Net Block) + Capital Work In Progress
2,82,612

8,953
Investments and other non current assets
54,654

1,536
Total Intangible Assets including those under development
142361.00

91

Total Assets
6,06,214
34,470

(Rs. Crore/ Rs. 10 million)
Desirable/ Recommended
Reliance Industries
(Year ending 31st March 2016)
NMDC Ltd.
(Year ending 31st March 2015)
Tangible Net Worth (Net Worth – Intangible Assets)

1,01,290
32,241
Current Ratio
More than 2
0.68
12.01
Quick Assets

16,094.00
20,195
Quick Ratio
More Than 1
0.09
10.15




Total Outside Liabilities/ Tangible Net Worth (TOL/ TNW)
Below 3
3.58

0.07




Total Term Liabilities/Tangible Net Worth (Long term Debt-Equity) Ratio
1 or less
1.74
0

Highlights:
  1. The current and quick ratios of Reliance at 0.68 and 0.09 are extremely and unacceptably poor. If not for Brand Reliance any other ordinary company having such poor ratios would have been termed sick and would not be able to raise any borrowings from banks and financial institutions.
  2. The TOL/ TNW and long-term debt-equity ratios of Reliance are outside the recommended range but not alarming.
  3. On the contrary NMDC balance sheet though vastly small in size compared to Reliance are extremely sound and attractive.

Conclusion: 
Based on Balance Sheet analysis Reliance is not justified to be included in a value-investing portfolio, even though it is a large, diversified and at the same time vertically integrated company with a very strong brand value.


III. Cash Flow Analysis:


Reliance Industries
(Year ending 31st March 2016)
NMDC Ltd.
(Year ending 31st March 2015)
 (Rs. Crore/ Rs. 10 million)


Net Cash Flows from Operating Activities
39,811

3999
Cash flows from Investing activities
(38,338)
1700
Cash flows from financing activities
(2,759)
(3449)
Final Net Change in cash flows
(1,286)
2250
Cash & Cash Equivalents at the beginning of the year
12,476
5683
Cash & Cash Equivalents at the end of the year
11,190
7933
Interest
9115
0.14
Dividends including dividend distribution tax
7259
3449
Percentage of Cash from Operations Distributed as Dividends
18.23%
86.25%
Net Addition of fixed assets and capital work in process
49,318
2,814
Percentage of Cash from Operations Used for fresh investment
123.88%
70.37%

Highlights:
  1. Reliance is generating net operating cash flows of around Rs.40000 crores every year, which is very good.
  2. Reliance distributed a meager 18.23% operating cash flows as dividends while NMDC distributed a whopping 86.25% as dividends.
  3. Reliance is creating new fixed assets at a very high pace (123.88% of operating cash generation), which can be expected to generate more profits and free cash flows in the future. NMDC is also making decently well on this score with 70% of operating cash generation being used and about 30% from borrowings. The difference between the two companies is that Reliance is creating new assets out of internal cash generation (being stingy in distributing dividends) and from borrowings whereas NMDC is using about 20% of internal cash accruals and rest from non-operating income and absolutely no borrowings.

Conclusion:
Stinginess in paying dividends is unforgivable. Otherwise the cash flow analysis is shows reliance in good light with appreciable generation of free cash flows.


IV. Dividend Track Record

Announcement Date
Effective Date
Dividend Type
Dividend(%)
Remarks
08/03/2016
17/03/2016
Interim
105%
Rs.10.50 per share(105%)Interim Dividend
17/04/2015
08/05/2015
Final
100%
Rs.10.00 per share(100%)Dividend
21/04/2014
16/05/2014
Final
95%
Rs.9.50 per share(95%)Dividend
16/04/2013
10/05/2013
Final
90%
Rs.9.00 per share(90%)Dividend
20/04/2012
31/05/2012
Final
85%
21/04/2011
05/05/2011
Final
80%
26/04/2010
10/05/2010
Final
70%
07/10/2009
16/10/2009
Final
130%
21/04/2008
08/05/2008
Final
130%
02/03/2007
21/03/2007
Interim
110%
27/04/2006
01/06/2006
Final
100%
27/04/2005
12/05/2005
Final
75%
AGM
29/04/2004
20/05/2004
Final
52.5%
AGM
23/04/2003
23/05/2003
Final
50%
30/09/2002
23/10/2002
Final
47.5%
12/04/2001
26/04/2001
Final
42.5%
30/03/2000
Interim
40%
22/04/1999
Final
37.5%
21/04/1997
Final
65%
Revised

 Highlights:

Company has paid uninterrupted dividends at least for the last 19 years at least.
Even though the rate of dividend on the face of it seems very attractive at 100%, as an absolute number it is very low on a CMP of over Rs.1000 the dividend yield of a poor 0.97%.

Conclusion:
Uninterrupted payment track record is good but yield is poor.



V. Dividend Coverage from non-operating income




FY 2015-16
Dividend
7,259
Net Non-Operating Income
8,246
Dividend Coverage from Non-Operating Income
113.59%

Coverage for payment of dividends at the current level of low quantum of dividends is adequate but if the dividends go up by four times, which in all fairness should, then the coverage will come down to about 25%, which is low.

On this parameter the company’s performance is not satisfactory.

B.Market Condition:


I. Price to Earnings Ratio:

PE Ratio is 11.27, well below the recommended 15 but marginally above our threshold of 10.

The market condition as far is this parameter is concerned is favorable.

II. Price to Book Value per Share:

After deducting intangible assets from net worth, the adjusted the price to book ratio still stands well above the recommended maximum of 1.5, at 3.08.

On this parameter the market condition is not favorable.


III. Dividend Yield:

Reliance’s dividend yield is a poor 0.97% while NMDC Ltd. pays handsome dividends.

On this parameter the market condition is highly un-favorable. Actually it is not the market condition but the frugal dividends paid by the company that needs to be blamed.

IV. Distance from 52 week high:

The 52-week low for this share is Rs.75.15. and the distance to 52-weel high is 11.48%. After the recent gain in the share price of 11.02% in the last quarter and the CMP standing at 103.30, the share today is available at +37.45% from the 52-week low. However on 15th January 2016 the CMP was Rs.89.10 and the 52-week low was Rs.123.05. At that level the price was trading at a discount 27.59%.

The market condition as far is this parameter is concerned is not favorable.

V. Five year Return:

The five-year return (return measured by change in share price) is +28.99%. Which means that there is no special advantage accruing out of market hammering of the scrip. The price of the scrip has gained about 28% in the past five years.

On this parameter the market condition there is no special favorable market condition.

C. Final Conclusions:

  1. Relaince Industries Ltd. is a large, well diversified company having a huge market capitalization.
  2. Profitability of the company’s operations as reflected in various profitability ratios are decent but not anything great. Many companies in our ‘Portfolio 2K15’ exhibit very high ratios.
  3. The balance sheet shows:

  • Significant levels of debt;
  • Poor Current Ratio of 0.68 well below the recommended 2.00;
  • Quick Ratio is much poorer than the current ratio at 0.09 as against the recommended 1.00;
  • The TOL/ TNW and long-term debt-equity ratios of Reliance are outside the recommended range but not alarming, yet on par with average small and medium companies/ family businesses.
  • Debt-Equity (long-term) is almost double the norm of 1:1 at 1.74:1.


        4. Cash flows and their deployment of Reliance are decent and satisfactory but for the poor dividends.
           5. Dividends distribution is poor but uninterrupted payment track record is good.
           6. In terms of market conditions, PE Ratio is good but P2BV Ratio is unacceptably high owing to the business model of Reliance were huge amounts of intangible assets like license fees are involved and thus pulled down the adjusted net worth and hence very high P2BV Ratio of 3.08.
          7. Dividend yield is poor at 0.97%. It is on account of company philosophy of growth of EPS and book value of share. The CAGR growth of EPS is 7.91% per annum in the last seven years.

D. Investment Decision:

The final investment decision in Reliance Industries Ltd. is very difficult to make. Company’s performance is mixed. Market conditions are reasonable but not especially good – for a company like Relaince, to expect very favorable market conditions is unrealistic, except during a global turmoil like those post Lehman Brothers. To complicate the matter further, Reliance is not a company that can be simply rejected or ignored either!

E. Final Advice:

  1. Buy. 
  2. Limit the amount to 5% of total stock portfolio. Buy with the knowledge you are not getting a great deal. When Lehman Brothers like situation recurs (recur it certainly will) buy big quantities to improve dividend yield and P2BV on account of lower prices.
Post Disclaimer: Opinions expressed here are the author’s personal opinions. Market conditions have a great bearing on many end results discussed in this report. No disrespect is intended towards the company, it’s management. Investors are advised not rely blindly on the opinions expressed herein but to exercise their own judgment. Neither the author nor the blog shall be responsible for any loss suffered by either acting or not acting based on the opinions expressed herein.







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