Unbundling The RIL Numbers
Together, Reliance Industries’ subsidiaries are a big enterprise
Here’s a funny fact. India’s biggest and most profitable company has a number of unprofitable offspring. According to the company’s 2009-10 (FY10) annual report, 62 of Reliance Industries’ (RIL) 82 subsidiaries — two-thirds of them — failed to turn in a profit, while the parent posted a Rs 16,236-crore profit.
Granted, the losses may not amount to much: just about $68 million or Rs 306 crore. But the amount invested in them is a formidable amount: approximately Rs 35,400 crore. According to a report by three Credit Suisse analysts — Sanjay Mookin, Saurabh Mishra and Prashant Gokhale — if that money had been invested in commercial paper, RIL’s earnings per share (EPS) would have been 11 per cent higher.
Together, the revenues of RIL’s subsidiaries amount to nearly Rs 45,000 crore ($10 billion), while that of RIL’s petroleum and petrochemical business is Rs 2,02,500 crore ($45 billion). The analyst report goes on to say that of this, $2.1 billion is invested in treasury stock. Another $3 billion is invested in operating companies (overseas E&P, Malaysian, African operations and retail) that earn very little today; $1.2 billion is in two SEZ companies that are valued (if at all) at cost; the balance $3.5 billion is in other assets that are typically not priced in.
Take Reliance Retail. Even after RIL invested Rs 5,220 crore to build a national retail chain, it is still losing money, though less than in past years. But because of tax gains, the subsidiary posted a profit of Rs 18 crore in FY10, compared to a loss of Rs 20 crore in FY09.
The Credit Suisse report suggests that though the subsidiaries could create earnings surprises, it is difficult to value them: “Other than holdings of treasury stock, it is, however, difficult to value these other investments firstly due to their small earnings (for instance, Reliance Retail) and secondly, due to lack of details on land and real estate investments.”
RIL’s publication of the details of its subsidiaries is seen as the company’s efforts at greater transparency; curiously, divulging the details appears to have an impact on the company’s stock. On 30 September, RIL shares were trading at Rs 984.50 on the BSE, down 16.9 per cent from this year’s best performance at Rs 1,184.70 on 11 January.
“The annual reports of subsidiaries give insight into RIL’s investment direction,” says Arun Kejriwal, director at KRIS (Kejriwal Research and Investment Services). “Reliance Retail is perceived as the engine for growth in future, that is evident considering the investments.”
Financial reports on two subsidiaries — Reliance International Exploration and Production, and Reliance Cypress — have not yet been made public; perhaps they will be in the next annual report. But the scale and size of the subsidiaries begs the important question: should not there be some kind of plan for these subsidiaries? Could any of them end up being sold? It has happened before. Eight years ago, RIL bought into a German textile firm, Trevira; the company continued to lose money, and finally Trevira went into German bankruptcy court last year.
RIL needs money for its broadband and power ventures too. Moreover, the company’s shale gas and overseas hydrocarbon blocks need capital investments. Of course, RIL has Rs 21,800 crore in cash reserves, some of which is also needed for working capital needs of the petroleum business. But nobody has access to the financials of the second layer of subsidiaries. It is still difficult to trace the flows from the sale of treasury stock — about Rs 9,300 crore. “We are not sure about the accounting of cash from the sale of treasury shares,” said Kotak Institutional Equities in its report. There is always something cooking at Reliance Industries.
Granted, the losses may not amount to much: just about $68 million or Rs 306 crore. But the amount invested in them is a formidable amount: approximately Rs 35,400 crore. According to a report by three Credit Suisse analysts — Sanjay Mookin, Saurabh Mishra and Prashant Gokhale — if that money had been invested in commercial paper, RIL’s earnings per share (EPS) would have been 11 per cent higher.
Together, the revenues of RIL’s subsidiaries amount to nearly Rs 45,000 crore ($10 billion), while that of RIL’s petroleum and petrochemical business is Rs 2,02,500 crore ($45 billion). The analyst report goes on to say that of this, $2.1 billion is invested in treasury stock. Another $3 billion is invested in operating companies (overseas E&P, Malaysian, African operations and retail) that earn very little today; $1.2 billion is in two SEZ companies that are valued (if at all) at cost; the balance $3.5 billion is in other assets that are typically not priced in.
Take Reliance Retail. Even after RIL invested Rs 5,220 crore to build a national retail chain, it is still losing money, though less than in past years. But because of tax gains, the subsidiary posted a profit of Rs 18 crore in FY10, compared to a loss of Rs 20 crore in FY09.
The Credit Suisse report suggests that though the subsidiaries could create earnings surprises, it is difficult to value them: “Other than holdings of treasury stock, it is, however, difficult to value these other investments firstly due to their small earnings (for instance, Reliance Retail) and secondly, due to lack of details on land and real estate investments.”
RIL’s publication of the details of its subsidiaries is seen as the company’s efforts at greater transparency; curiously, divulging the details appears to have an impact on the company’s stock. On 30 September, RIL shares were trading at Rs 984.50 on the BSE, down 16.9 per cent from this year’s best performance at Rs 1,184.70 on 11 January.
“The annual reports of subsidiaries give insight into RIL’s investment direction,” says Arun Kejriwal, director at KRIS (Kejriwal Research and Investment Services). “Reliance Retail is perceived as the engine for growth in future, that is evident considering the investments.”
Financial reports on two subsidiaries — Reliance International Exploration and Production, and Reliance Cypress — have not yet been made public; perhaps they will be in the next annual report. But the scale and size of the subsidiaries begs the important question: should not there be some kind of plan for these subsidiaries? Could any of them end up being sold? It has happened before. Eight years ago, RIL bought into a German textile firm, Trevira; the company continued to lose money, and finally Trevira went into German bankruptcy court last year.
RIL needs money for its broadband and power ventures too. Moreover, the company’s shale gas and overseas hydrocarbon blocks need capital investments. Of course, RIL has Rs 21,800 crore in cash reserves, some of which is also needed for working capital needs of the petroleum business. But nobody has access to the financials of the second layer of subsidiaries. It is still difficult to trace the flows from the sale of treasury stock — about Rs 9,300 crore. “We are not sure about the accounting of cash from the sale of treasury shares,” said Kotak Institutional Equities in its report. There is always something cooking at Reliance Industries.
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