The standalone company appears to be a brilliantly run entity. But the siblings appear to all here and there at the same time
'The great Indian opportunity is the wellspring of our strength'
The company in a nutshell
The highlights of the company's functioning, provided in the initial pages of the annual report says it all. It has the largest refining capacity at any single location. It is the largest producer of polyester fibre and yarn. It is the fifth largest producer of paraxylene, and polypropylene, and is the eight largest producer of purified terephthalic acid and mono ethylene glycol. The company also generates 14% of India's total exports, accounts for 5.5% of the central government's indirect tax revenues, and has a weightage of over 9% in the BSE Sensex.
In his takeaway to the shareholders, the Chairman Mukesh Ambani literally glows at the achievements of the company. The company has the best in class refining assets, and it has consistently operated at over 100% of design capacity. In the latest accounting year the refineries achieved the highest ever crude processing of 67.6 million tonnes surpassing the previous record by over a million tonnes. The partnership with British Petroleum will unlock the true potential of the company's deep water exploration blocks by leveraging BP's skills. The company has also invested significantly in shale gas joint ventures which are now fully operational.
Expanding its reach
Its planned expansions in the petrochemical segment have commenced and are now principally aimed at addressing the growing consumption in India. The company has taken the leadership position in food, apparel, and consumer electronics in the retailing segment. The company has over 1,300 operational stores. Its foray in the broadband Access segment is aimed at achieving a leadership status in providing digital services to a large base of consumers. It is also building one of the largest coke gasification facilities in the world with a capital expenditure of US$ 4 bn over the next 3-4 years. This expansion will significantly increase the complexity and profitability of the refinery. This in a nutshell is the learned observation of the Chairman. The company has also acquired a significant minority stake in EIH Ltd, Extramarks Education and TV-18 and a JV with DE Shaw to offer a comprehensive array of financial services. What these latter investments have to do with the brand equity of Reliance has not been spelt out, but the company is also becoming a tooth fairy of sorts for corporates which have to bailed out for one cockide reason or another. One wonders when they will start bankrolling the Central Government which is also bankrupt.
Major product lines
The major product lines are refining, petrochemicals, textiles, retailing, and broadband. The retailing segment is further broken down into 26 speciality stores. It is also into transportation fuels, field management services, highway hospitality services, vehicle care services, convenience shopping, foods, auto LPG, petroleum retailing through GAPCO, and lubricants. GAPCO owns large storage facilities in the African continent. It has 14 plant locations based in 5 states - Gujarat, Maharashtra, Uttar Pradesh, Punjab, and Andhra Pradesh, and one Union Territory - Dadra and Nagar Haveli.
Not only is the standalone company humungous - a gross fixed asset base of Rs 2,055 bn consisting of owned/ leased tangible gross block of Rs 1,572 bn, and intangible gross block of Rs 483 bn. The intangibles in the main consist of development rights of Rs 352 bn and Others of Rs 92 bn. (Curiously enough the gross block base has dipped by Rs 157 bn as compared to the preceding year end).The wonder here is that it still believes in the leasing concept to acquire assets. It had borrowings of Rs 586 bn, a relatively piddling equity base of Rs 32.7 bn, reserves and surplus of Rs 1,628 bn, inventories valued at Rs 360 bn, loans and advances to related parties amounting to Rs 162 bn, cash and bank balances of Rs 395 bn, and, investments to the tune of Rs 540 bn. The investments can be broken down into tied investments at Rs 234 bn, and discretionary investments of Rs 306 bn. (The exhaustive list of related parties consists of 116 subsidiaries, ten associates, and five enterprises over which the company is able to exercise significant influence.
The many siblings and yet others
Separately another list also appends the names of another 26 associates and/or JVs. The anomaly between the two lists has not been explained). The company also ratcheted up gross revenues of Rs 3,300 bn (excluding other income) and a pre-tax profit of Rs 258 bn. What is very revealing in the revenue quotient is that indirect taxes chipped in with a mere Rs 99 bn. The other revelation is that other income which consists of such large titbits as interest, dividend, and net gain from sale of investments at Rs 62 bn accounted for a whopping 24% of pre-tax profit. In the preceding year the contribution of other income at Rs 31 bn was far less impressive - considerably lower interest income and from lower gain on sale of investments - accounting for 13% of pre-tax profit. The increased contribution of other income came in very handy considering that the pre-tax profit was stagnant at Rs 258 bn, against a gross revenue growth of 33% for the year. The tax man too does not get much in the form of tithes, with the tax provision at 20% of the pre-tax profit.
Efficient management of resources
As the cash flow statement, or rather the funds flow statement for the year 2011-12 shows, the company is generating more than enough cash from its operating activities to take care of its other needs both on the investment and financial asides. The company generated some Rs 270 bn net from operating activities. The net addition to fixed assets was only a piddling Rs 80 bn - given the gargantuan size of its gross block. As a matter of fact the sale of developmental rights for the development of capital assets raised some Rs 232 bn. This is one company which sure as hell knows how to raise capital every which way. For reasons best known to the company it even tried to make a few pennies by buying and selling securities of the total value of a phenomenal Rs 6,478 bn! However if the company has made any money at all from this exercise there is no visible evidence of any such lucre in the other income schedule. But, nevertheless, the purchases exceeded the sales by a mean Rs 170 bn, and this in turn represents accretion to its investment portfolio. Not only was it able to add to its portfolio of investments, it was also simultaneously able to reduce debt by Rs 53 bn at year end.
The more remarkable aspect of the company is its ability to generate margins despite the company toting up a gross turnover of only 1.6 times the gross block. Quite obviously the company is adding high octane value to the products post production, on sale. What undoubtedly helped matters was the fact that the company's humungous investments of Rs 540 bn could yield a return of Rs 44 bn in the form of interest and dividends, and separately, also generate an amount of Rs 16.4 bn in the form of net gain on the sale of investments. (It helps quite some bit that a chunk of its tied investments are of the coupon rate debt variety and the fact that the year-end cash balances amounted to Rs 396 bn). But to be noted is that the latter figure of Rs 16.4 bn is not a steady yearly source of income accretal. The other revealing factor in cash flow generation is the company's ability to sell cash down, well almost. The year - end trade receivables at Rs 184 bn was only a small slice of the overall sales revenues. On the other hand trade payables at Rs 403 bn was substantially larger than receivables. In other words this is a company which has mastered the art of superior management skills - and such skills are the end product of a professionally run company.
The several sour lemons
But there is scope yet to improve on its track record. Namely, through the investments rolled out in its subsidiaries and associate companies. As stated earlier it appears to have 116 subsidiaries, and it has published the brief working results of all barring one it appears. A vast majority of the companies are 100% owned, but the list includes a company in which the parent has a stake of only 45.5% - apparently the management of this company must be under the control of the parent or some such. The companies are spread over 19 countries including India. From my understanding of the operations of the siblings, there are 86 operating out of India, nine in the United States, seven in the African continent, four in Mauritius, three each in the UAE and the Netherlands, and the rest are scattered in the UK, Luxembourg, British Virgin Islands, Australia, Singapore, and Malaysia. From the brief financial information of the subsidiaries which have been furnished, the majority are a bunch of non performers. It would appear that the management of the parent has a penchant for incorporating companies without any specific purpose in mind.
Consider the following data. The consolidated operations boasted revenues of Rs 3,585 bn and other income of Rs 62 bn. Compare this with the figures of the standalone entity-Rs Rs 3,299 bn and Rs 62 bn. The value addition in terms of top-line and bottom-line is what one would call deficient. Some 93 of the 116 companies boast of zilch turnover or a negligible turnover below Rs 5 crores. Of the ones which are extant, the top gun here in terms of top-line is the 100% owned Yankee sibling RIL USA Ltd with a gross income of Rs 278 bn and an almost zero pre-tax profit. This company had total assets of Rs 27 bn and a zilch return to show for it. The more remarkable aspect of this company is that it was able to achieve its operative results on a piddling capital base of Rs 150 m. This would appear to be real fancy stuff of the nether kind. Next in the pecking order is the Malaysian sibling Recron (Malaysia) with a gross income of Rs 64 bn and a pre-tax bottom-line of Rs 740 m. Here too the paid up capital is a very modest Rs 42 m. Third in line is Gapco Kenya with a top-line of Rs 58 bn and a pre tax bottom-line of Rs 12 bn. This company too manages on a meagre capital base of Rs 910 m. There are only a few other companies of relevance here, top-line wise, including the as yet struggling Reliance Fresh with total income of Rs 39 bn and a loss before tax of RS 4.2 bn. This company makes do with a capital base of just Rs 10 m and negative reserves of Rs 13 bn! This is really very far out stuff, and could be one of the very good reasons why this company is haemorrhaging so badly. Keeping company is Reliancedigital Retail with figures of Rs 12 bn and a loss before tax of Rs 820 m. This company too makes do with a very minimum capital base of Rs 10 m and negative reserves of Rs 1 bn.
More of the same
If there are companies in the listing with large turnovers, small bottom-lines and miniscule capital bases, then there are a score of companies or so with large asset bases, large capital bases and no revenues to show for it. It works both ways it appears. The two toppers here are Reliance Retail with a capital base of Rs 83 bn, total assets of Rs 89 bn, revenues of Rs 940 m and a loss before tax of Rs 10 m. Reliance Industrial Investments -which is definitely a group investment holding company - has a capital base of Rs 1.5 bn, assets of Rs 122 bn, investments of Rs 22 bn, a total income of Rs 7.3 bn and a loss before tax of Rs 1 bn. Since the investments are a part of the total assets, what then constitutes the balance assets of Rs 100 bn please? There are numerous other nuggets like this - but expanding on them would tend to make this copy a bit too long winding.
Suffice to add that the performance yardsticks of the siblings do not appear to quite fit into the mindset of the company. The chairman in his message to the shareholders says -'We have been successful in insulating and de-risking our portfolio of businesses by following a prudent operating discipline and further strengthening our rock solid foundation for investments in future growth engines'. The financials of the siblings do not quite match the walk the talk of the chairman.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.