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:
- 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.
- 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:
- Even though the operating margins of Reliance are humble compared to NMDC Ltd., considering the gigantic scale of operations lower margin can be accepted.
- 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:
- 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.
- The TOL/ TNW and long-term debt-equity ratios of Reliance are outside the recommended range but not alarming.
- 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:
- Reliance is generating net operating cash flows of around Rs.40000 crores every year, which is very good.
- Reliance distributed a meager 18.23% operating cash flows as dividends while NMDC distributed a whopping 86.25% as dividends.
- 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:
- Relaince Industries Ltd. is a large, well diversified company having a huge market capitalization.
- 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.
- 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.
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:
- Buy.
- 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.
