RELIANCE INDUSTRIES: Co Needs to Show that it Can Cash In on New Openings

Once the darling of stock markets, RIL seems to be out of favour now. Plagued by a host of issues, the company has found the going tough in the recent past. But it is trying to break free with a foray into new businesses

    Even after underperforming the broader markets for three years in a row, Reliance Industries does not appear attractive for retail investors. The company has achieved a massive size without compromising on balance sheet health. However, there is little clarity on where its incremental profits would come from. There is still time before its investments in diverse businesses start making their presence felt and in the immediate future all its existing businesses appear to be under pressure. 

CURRENT SCENARIO Reliance Industries (RIL) is currently facing problems in all its key business verticals. Natural gas output from its KG-D6 block has been on the decline for more than a year, and is likely to continue falling well into FY13 and FY14. The company's latest status report to the petroleum ministry mentioned that the production is likely to fall from 35 mmscmd now to 27.6 mmscmd in FY13 and 22.6 mmscmd in FY14.
Its refining business is witnessing a margin squeeze as an economic slowdown lowers demand for fuels. The company’s December 2011 quarter saw its gross refining margins dip to a two-year low of $6.8 per barrel. Similarly, a slowdown in demand for petrochemicals and polymers is having an adverse impact on RIL's third important business segment. The margin pressure is likely to continue, at least, for another year until the global economy improves. Besides business problems, the company has other woes. For more than two years, RIL has been trying to get a reprieve in two of its cases with market regulator Sebi — one over the breach of insider trading norms in 2007, and another over the breach of creeping acquisition norms in 2000. At the same time, its production-sharing contract for the prized KG-D6 block has come under criticism by the country's audit watchdog CAG, which recommended its immediate review. RIL's capital expenditure for the KG-D6 block is also being reassessed.
RIL’s recent disclosure of its stake in several ETV channels surprised investors and prompted Sebi to launch an examination to ascertain whether the company had made proper disclosures in the past. 

NEW INITIATIVES RIL has long been taking initiatives to enter a variety of different industries. It has been present in the organised retail business for over five years and has invested $3.15 billion in shale gas assets in the US. Over the last one year, the company has formed several joint ventures for entering new businesses. It joined hands with DE Shaw Group for a financial services foray and launched a JV with Siemens for homeland security solutions. Recently, it floated India Gas Solutions —a joint venture with BP to import LNG to India and another one with SIBUR for butyl rubber. In addition, the company has bought strategic stakes in various companies — the most recent being the acquisition of an undisclosed stake in the TV18 Group and a 14.8% stake in East India Hotels. 

FINANCIALS RIL became debt-free at the net level by the end of December 2011 as its cash balance of 74,539 crore exceeded the debt on its books. For the first nine months of FY12, its net profit grew 6% to 15,804 crore, while net sales jumped 39.4%. Its operating and net profit margins have been consistently under pressure and dipped to multi-year low levels in the Dec ember quarter.
The company’s share buyback programme is currently under way to buy up to 12 crore shares for a maximum price of 870. 

VALUATION The RIL scrip is currently trading at a price-to-earnings multiple of 12.3 and price-to-book value of 1.8. These are low when compared to the company's historical valuation levels. However, in view of the problems ahead for the company they don’t appear attractive for a retail investor.