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Reliance Industries: Where growth is a way of life - Outside View

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Reliance Industries: Where growth is a way of life
Jul 14, 2010

Expand and diversify is the mantra

Taking stock of the working results of RIL, is about as taxing as, say, figuring out your wife's point of view. But at least RIL's thinking sounds most aspirational. Think Growth. Think Transformation. Think Reliance-- is the company's punchline. The voluminous annual report which is replete with altruistic statements has one very significant observation. The production from the Dhirubhai 1 and 3 discoveries, it says, has the potential to account for 40% of the nation's current hydrocarbon production.

The management is seemingly hell bent on transforming the Indian corposphere, and how. The thrust given by the late founder somehow seems to accelerate, so to speak. Expand and diversify even if you lose focus is the mantra. (It has just announced in no uncertain terms that it is returning to the telecom space with a vengeance). The fallout is that the turnover continues to escalate by leaps and bounds, in spite of its already humungous size - profit margins can never keep pace, given the time lag. It is also a tribute to the management's ability to shore up the quality of its managerial inputs, to meet its ever growing appetite, for still more.

Gross block additions during the year, mostly in plant and machinery, totaled Rs 665 bn (Rs 457 bn previously), though the directors' report states that the capital expenditure during the year was only Rs 219 bn. The latter figure however tallies with the cash flow statement. The total gross fixed assets base at year end (excluding revaluation and capital work in progress) totals Rs 1,777 bn. RIL believes only in mega buck figures. This fixed asset base is on an paid up equity base of just Rs 3.3 bn

High sales growth but low profitability...

Gross total income at Rs 20,286 bn was a cool 37% more than in the preceding year. Profit after tax however grew at a more iffy 6% to Rs 1,623 bn. And, after a prolonged siesta, and to partly deflect the heat off the then increasingly acrimonious fracas with younger sibling, Mukesh also doled out a 1:1 issue of bonus shares to eager shareholders, who nevertheless, were caught by surprise.

Profits at the net level got a jolt as price realizations declined, though on far higher volume sales (the report does not dwell much on these aspects). There are of course far too many value added by products to dwell on. Raw material input costs went up a few notches and, depreciation and depletion charges together rose 100% to Rs 105 bn. Dividend quantum was marginally hiked on a higher capital base.

Stay tuned for new oil & gas discoveries…

There was a sharp increase in crude oil refining capacity at 60 million metric tones (mMT), 33 mMT previously against which there was a 55% hike in production of petroleum products at 46 mMT (29.7 mMT). Production of gas during the year saw an exponential increase of 686% at 4,35,157 billion British thermal unit (BBTUs), 63,393 BBTUs previously. It has the capacity to make 34 petrochemical by-products for sale but apparently makes and sells only 24 of them (excluding crude oil and gas). Individual sales figures are not given, due to the government exemption in the matter of such disclosures. It also sold 1 mMT of crude oil for some reason. The bulk of the crude oil that it consumes is imported, and hence the large raw material import bill of Rs 1520 bn. Against its own 'proven' oil reserves of 11 mMT, the company has 8.6 mMT (4.97 mMT) of 'developed' reserves.

Its 'proved' reserves and the 'developed' reserves of gas was almost unchanged during the year vis-a vis the preceding year. But with 25 blocks in the East Coast of India under different stages of maturity, and other developments in the West Coast, and yet others in the works in different parts of the world, stay tuned for new announcements round the clock.

Multiple subsidiaries run amuck

The company has a passion for subsidiaries of all shapes and sizes, including ones with big ticket equity bases, who in turn sport the Reliance badge. For the matter of record there appear to be 94 subsidiaries in all. (No wonder then that it has 3 accounting firms auditing its books). Its equity/preference/convertible debenture investment in these companies exceed Rs 140 bn, and not including the loans that RIL has lavished on them. The big boys in this game changer are Reliance Retail which is 'top of the pops' with an equity investment of Rs 52 bn, followed by Reliance Ventures with Rs 23.5 bn, Reliance Exploration with Rs 21 bn, Reliance Gas Transportation with Rs 20 bn, Reliance Jamnagar Investment with Rs 10 bn, Reliance Industrial Investments with Rs 6 bn, Reliance Industries Middle East with Rs 4.5 bn, Reliance Global vision with Rs 3 bn and so on.

The vast bulk of the subsidiaries have paid up equity bases, in rupee terms, which are laughable by any standards and, by the standards of RIL can be rated as most derisory. Some of these worthies like Reliance Polymers, Reliance Polyolefins, Reliance Aromatics, Reliance Energy, Reliance Chemicals and, Reliance Universal, which have large investment portfolios, may well be some sort of investment arms of the parent, or some such, but with zilch revenue accruals, and believe it or not, with large reserves. Yet others like Reliance Progressive Traders, Reliance Prolific Traders, Reliance Commercial Land, Reliance Corporate IT Park, and Reliance Eminent Trading have large asset bases but have little or no turnover accruing to them either, and like the other siblings have large reserves. Only Reliance Malaysia, Gapco Kenya, and Reliance USA have turnovers matching the standards expected of the RIL Group - but their bottomlines are, well another story.

Unprofitable retail arms

Reliance Retail, of course takes the cake. The largest of the subsidiaries in equity investment terms, it barely rustles up a turnover of Rs 2.9 bn, and had a negative pretax bottomline, though making do with a miniscule post tax positive bottomline!!! Its sibling, Reliance Fresh, with an almost non-existent equity base, however recorded a turnover of Rs 20.8 bn but recorded a negative pretax bottomline. This is truly amazing and both Reliance Retail and Reliance Fresh should feature as case studies in management schools.

The other heavyweight, Reliance Exploration, with an equity base of Rs 1.7 bn appears to be into drilling and drilling, and deriving precious little revenue from its main line of business. Consequently it has losses far in excess of its turnover. This is very perplexing as RIL prides itself on its success in discovering new oil and gas fields. Equally flummoxing is the working of Reliance Haryana SEZ which with a non-existent equity base but has assets worth Rs 34 bn. No comparison is possible with the working results of these companies for the preceding year, and it is presumed that these results are for the same accounting period as that of the parent.

A prime candidate for 'Ripley's Believe It Or Not'

The company on paper displays an amazing dexterity in its funds management capabilities. On an average loan base of Rs 682 bn for the year, the interest charged to the profit and loss account is a miniscule Rs 20 bn or a percentage interest cost of 2.9%!!!! This is truly amazing and but it does not obviously reflect the interest paid on loans spent on asset creation and debited to fixed assets, before the asset went on stream. Still, a very eye popping performance and, a prime candidate to be featured in the 'Ripley's Believe It Or Not' story book.

Like all large companies it too has developed a fascination for funds churning. During the year it apparently bought mutual funds to the tune of Rs 1988 bn and sold almost as much. What margins RIL earned from this exercise is not readily available, but more to the point what benefit companies garner from this seemingly mindless exercise is not immediately clear.

Pay attention to the footnotes

For a company with its scale of operations what stands out most glaringly is the note dealing with its disputed income tax (IT) liabilities. A footnote states that IT assessments have been completed up to the assessment year 2007-08 and that the disputed demand outstanding up to this year is only Rs 7 bn - a demand that the company says it has been legally advised is untenable. This is truly far out and RIL is definitely a good corporate citizen!!! Disclosure: Please note that I am a shareholder of this company

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.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
© Equitymaster Agora Research Private Limited

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3 Responses to "Reliance Industries: Where growth is a way of life"


Jul 22, 2010

Whatever the ways may be Reliance Industry and associates are well appreciated by the equity market

Like (1)


Jul 22, 2010

Please let me know when will the expected Bonus be delivered.

Like (1)


Jul 14, 2010

resp sir,

Like (1)
Equitymaster requests your view! Post a comment on "Reliance Industries: Where growth is a way of life". Click here!

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