Frav Group 23

Post Graduate Programme in Management

In partial fulfillment of the

Financial Reporting Analysis and Valuation Course

Financial statement analysis and Valuation

on

Reliance Industries Limited

Submitted to

Prof. V. K. GUPTA

Submitted by

Group 23

Group membersAravinth Raj G

Mathan Kumaran VSivabalan D

Submitted on

August 29, 2015

1 | P a g eFinancial Reporting Analysis & Valuation Group 23

Table of Contents:

S. No Topic Pg. No

1 Introduction 3

2 Business Strategy analysis 3

3 Industry Description 4

4 Sustainable growth analysis 4

5 Economic Value added Analysis 6

6 Quality Earnings calculation 6

7 Projected financial statements & Free cash flow 7

8 Valuation using FCF method & RE method 9

9 Sensitivity Analysis 9

10 Conclusion 13

INTRODUCTION:


Reliance Industries Limited (RIL), the second-largest publicly traded company in India by market capitalization, is a conglomerate holding company headquartered in Mumbai, Maharashtra, India. Reliance owns businesses in energy, petrochemicals, natural resources, textiles, retail and telecommunications. Reliance is the most profitable company in India, and the second largest company in India as measured by revenue after the government-controlled Indian Oil Corporation. Ranked 114th on the Fortune Global 500 list of the world's biggest corporations, RIL contributes approximately 20% of total Indian exports.

RIL`s equity shares are listed on both of the Indian Markets- National Stock Exchange of India Limited (NSE) and the Bombay Stock Exchange Limited (BSE).The number of shareholders in RIL are approximately 3 million. The promoter, Ambani family, holds approximately 45.34% of the total shares. A government company LIC India is the largest non-promoter investor in the company with 7.98% shareholding. However, the remaining 54.66% shares are held by public shareholders, FII and corporate bodies. Based on its performance, The Company was selected as one of the world's 100 best managed companies for the year 2000 by the reputed Industry Week magazine.

BUSINESS STRATEGY ANALYSIS:

RIL`s main strategy is to grow, by leveraging its existing asset base and seek investing in opportunities that is strategic to its existing business. The company initially focused on activities and investments in India to take advantage of the huge domestic market. After attaining the leader position here, they have rolled out their operation on a global scale.

All over the years, it is obvious that it will not invest unless the investment creates value for its shareholders. No further steps would be taken unless this basic criteria is met.

Reliance Industries Limited initiated a structured dialogue with their key stakeholders in 2006 and further it strengthened this engagement

In the year 2007 and hence understanding their concerns and expectations to find common solutions. Based on this they have assigned the following strategies for themselves, i.e., Providing opportunity to their stakeholders to raise their concerns, broadening the risk universe; manage risks and reputation thorough participative engagement, re-engineering the processes and establishing partnerships/collaborations to find common solutions, exploring new strategic opportunities in the market and building trust between RIL and its stakeholders. The strategic milestones the company has enjoyed over a period of time are significant investments in E&P of O&G to secure energy supplies, implementing systems to monitor and measure sustainability performance, Introducing sustainability awareness programmes in the formed Reliance Innovation Council.

Some of the unique strategies that they follow in energy sector differentiates them from the rest are as follows: Reduction of cost of power generation, Ensuring fuel supply, Focusing on power deficit regions and establishing an Optimal mix of off-take arrangements.

INDUSTRY DESCRIPTION:


The global economy in FY 2014-15 saw a steep decline in oil prices, which had significant impact on energy businesses. This coupled with slowing growth in some of the leading global economies impacted currencies. But, there was positive news in terms of faster-than-anticipated economic growth recovery in the United States, which provided momentum for the global economic recovery.

RIL is among the world’s largest producers of petrochemicals with global scale capacities across the polymer and polyester chain. Vertical integration from oil & gas to refining and downstream petrochemical products is among RIL’s key competitive advantage. This provides RIL feedstock security, scalability and economies of scale. RIL is the pre-eminent petrochemical company in India with a product portfolio spanning across polymers, polyester, fibre intermediates, elastomers and chemicals

RIL constantly focuses on technology, cost improvements and safe practices, while continuing to invest in new growth opportunities

SUSTAINABLE GROWTH ANALYSIS:

The RIL’s performance can be understood based on the growth in different aspects. The determined growth factors can be used for the following:

1. Business analysis2. Financial analysis3. Accounting analysis4. Valuation analysis

To ensure a robust sustainability practice that will help advance business priorities, drive innovation, and achieve a competitive advantage, RIL’s ’4P approach‘, along with key focus areas, delineate actionable points in order to percolate sustainability within every facet of the organisation.

Mar '15 Mar '14 Mar '13 Mar '12 Mar '11

Revenue3,29,076.0

03,90,117.0

03,60,297.0

03,29,904.0

02,48,170.0

0Gross profit margin 9.60% 7.91% 8.54% 10.19% 15.36%PAT 22,719.00 21,984.00 21,003.00 20,040.00 20,286.00PM 6.90% 5.64% 5.83% 6.07% 8.17%

Total Asset3,05,317.0

02,82,572.0

02,33,488.0

02,21,596.0

02,09,510.0

0PAT + Interest (1-t) 24,543.89 24,455.74 23,343.67 22,096.18 22,080.82ROA 8.039% 8.655% 9.998% 9.971% 10.539%

Total Equity2,16,176.0

01,97,091.0

01,78,965.0

01,62,969.0

01,46,082.0

0ROE 10.51% 11.15% 11.74% 12.30% 13.89%Earnings per share 70.21 68.02 65.05 61.26 61.97Capital employed

1,92,744.00

1,96,510.00

1,80,979.00

1,67,588.00

1,71,858.00


ROIC 16.40% 15.71% 17.01% 20.06% 22.18%

Mar '15 Mar '14 Mar '13 Mar '12 Mar '110.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

PM

ROA

ROE

From the above graph, it is observed that the firm growth is gradual marginal decrease from March 2011 to March 2015 in profit margin, ROA and ROE. But growth rate is almost remains constant in that range.

Year on Year Growth difference

Mar '15

Mar '14

Mar '13

Mar '12

Revenue

-15.65

% 8.28% 9.21%32.93

%

Gross profit margin 21.3% -7.4%-

16.1%-

33.7%PAT 3.3% 4.7% 4.8% -1.2%

PM 22.5% -3.3% -4.0%-

25.7%Total Asset 8.0% 21.0% 5.4% 5.8%PAT + Interest (1-t) 0.4% 4.8% 5.6% 0.1%

ROA -7.1%-

13.4% 0.3% -5.4%Total Equity 9.7% 10.1% 9.8% 11.6%

ROE -5.8% -5.0% -4.6%-

11.4%Earnings per share 3.2% 4.6% 6.2% -1.1%Capital employed -1.9% 8.6% 8.0% -2.5%

ROIC 4.3% -7.6%-

15.2% -9.6%

Divident payout12.96

%12.70

%12.51

%12.63

%

Retention rate87.04

%87.30

%87.49

%87.37

%Growth = ROE * Retention 9.15% 9.74% 10.27 10.74


rate % %

ECONOMIC VALUE ADDED:

It aims to measure the firm’s ability to generate profits in excess of the cost of the capital employed

Method of calculating EVA:

1. EVA = NOPAT –(Cost of capital * total investment)2. EVA = RONA – Cost of capital * capital3. EVA = (NOPAT/Capital – Cost of capital) * capital

Cost of Equity:10-Year Treasury Constant Maturity Rate, Rf

2.28%

Beta 1.06 (from Reuters)Market Premium 7.00%Re 9.70%Cost of Debt:

Mar '15 Mar '14 Mar '13 Mar '12

Avg debt 80,921.00 63,419.0051,889.5

052,501.0

0Interest expense 2,367.00 3,206.00 3,036.00 2,667.00Rd 2.93% 5.06% 0.058509 0.050799Avg Rd 3.99% 5.45% 5.47% 5.08%WACC 7.766%Total Capital 3,05,317.00Cost of Capital employed 23711.3254

NOPAT = EBIT (1-t)24364.2540

4EVA = NOPAT - Cost of capital employed

652.9286421 (sensitive wrt Market premium)

QUALITY EARNING

The profits reported in financial statement are ‘manipulated profit’ or ‘dirty profit’. For evaluating the company, the comparison should be done on the same platform. That profit is known as ‘clean profit’ or ‘quality profit’.

Reasons for low quality earnings in financial statement:

1. Earnings based on liberal accounting principles, such as FIFO and straight-line depreciation.

2. Earnings that are volatile over time.3. Earnings that are unlikely to be realized in a distributable cash form.4. Earnings that do not reflect economic reality and are overly optimistic of the future.5. Earnings that are the result of excessive or questionable financial deals.


Reasons for high quality earnings in financial statement:

1. Earnings determined by conservative accounting principles, such as LIFO and accelerated depreciation.

2. Earnings that do not fluctuate far from their trend line.3. Earnings that are potentially distribute in cash.4. Earnings that reflect a prudent, realistic view of the company’s current and anticipated

circumstances.5. Earnings that come from operations and not from financial manoeuvres that may

jeopardise stockholder equity in the firm.

Variation in depreciation calculation:

We have compared RIL with its comparable company IOC for estimating its asset life time to determine the quality earnings and the results are tabulated.

For RILMar '15 Mar '14 Mar '13 Mar '12 Mar '11

Gross FA 2,05,638.00 1,94,542.00 1,87,607.00 1,82,946.002,03,686.0

0Acc dep 91,075.00 85,136.00 77,859.00 69,223.00 60,979.00Current yr dep 8,488.00 8,789.00 9,465.00 11,394.00 13,608.00Approximate Useful life 24.23 22.13 19.82 16.06 14.97App. Age of asset 10.73 9.69 8.23 6.08 4.48

For IOCMar '14 Mar '13 Mar '12 Mar '11

Gross FA 1,11,730.13 1,04,104.83 99,455.46 92,696.69Acc dep 48,781.34 43,472.10 39,336.13 34,509.29Current yr dep 5,760.09 5,200.99 4,867.79 4,546.67Approximate Useful life 19.40 20.02 20.43 20.39App. Age of asset 8.47 8.36 8.08 7.59

RIL has expected to have more life for its asset. Hence to find clean profit, considered the common platform

In 2014, the Rs. 1,240 cr has to be reduced from its original profit due to the over estimation of its asset life time.

Expected to be paid (Rs. in crs) 10029.3397

Actually paid (Rs. in crs) 8,789.00Profit has to be reduced (Rs. in crs) -1,240.34

Unrealised gain:Other Income


Interest 14-15 13-14

From Current Investments 301 442From Long Term Investments 1054 1025

4059 50055414 6472

DividendFrom Current Investments 243 88

From Long Term Investments 7 3250 91

Net gain on sale of investmentFrom Current Investments 1011 1716

From Long Term Investments 2035 6323046 2348

Other non-operating income 11 25

Other income 8721 8936

Gain from sale of investment (Rs. in Crs) -698

Unexpected gain

Payables and Receivables:

RIL RIL IOC IOC2015 2014 2014 2013

Trade payables 54470 57862 35,697.00 29,667.00payables % of sales 442.88% 569.90% 7.54% 6.64%

Trade receivables 4661 10664 11,023.00 11,257.00Receivables of sales 37.90% 105.03% 2.33% 2.52%

As compared with IOC, RIL is managing its cash conversion cycle in a better way. (i.e) its account payables are more and its accounts receivables are less with respective to its comparative company.

Quality earning summary (Rs. in Crs)

Before taxAfter tax

Adj. Depreciation (less) -1240 -956Adj. Other income less) -698 -538Net (less) -1938 -1494Dirty earnings 29468 22719


Clean earning (4-3) 27530 21225

RIL has expected to have more life of 25 yrs with respect to IOC of 19 years for calculating its dep. Hence to find clean profit, considered the common platform (compared with IOC)

FORECASTING AND VALUATION:

The forecasted figure based on the assumed growth rate of 8.69% is as follows:

Mar-16 Mar-17 Mar-18 Mar-19 Mar-20Net sales 3,70,431 4,02,621 4,37,609 4,75,637 5,16,970Total income 3,79,368 4,12,335 4,48,167 4,87,112 5,29,442Total Expenditure 3,33,521 3,62,503 3,94,005 4,28,244 4,65,458Operating Profit 38,241 41,564 45,176 49,101 53,368Profit Before Tax 30,640 33,302 36,196 39,342 42,761PAT 24,165 26,265 28,547 31,028 33,724

• The forecasting is done by calculation the sales ratio method. The average growth from 2011-2015 was taken as the growth of the sales for the 5 year forecast period.

Valuation:

The valuation is done based on the FCF method.

In this method the free cash flow for 2016-2020 was calculated and the terminal value is calculated.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Free Cash Flow 17,228 -5,890 30,769 6,824 49,302 11,871 14,434 17,218 20,245 23,535

WACC of RIL is7.76613%, and the g=1.5% is taken.

Item ValuesValue 449627.01Growth 0.0150WACC 0.0777No of outstanding (in Crs) 323.59Share price (in Rs.) 2120.88

Total value of the firm is found to be Rs.449627 Crs.

SENSITIVITY ANALYSIS:


Sensitivity analysis is done by varying WACC and growth each at a time to determine the value of the firm and its share price.

a) Changing Growth rate by keeping cost of capital constant:

Growth 1.50% 1.75% 2% 2.00% 0.50% 0.00% -1%WACC 0.078 0.078 0.078 0.078 0.777 0.777 0.777No of outstanding share 323.586

323.586

323.586

323.586

323.586

323.586

323.586

Value 449627 466446 473572 484724 393922 371449 334194

Share price2120.88

2 2200.6 2233.3 2286.4 1858 1752 1576

b) Changing cost of capital constant by keeping Growth rate constant:

WACC 0.077661 0.08 0.09 0.1 0.06Growth 1.50% 1.50% 1.50% 1.50% 1.50%No of outstanding share 323.5864 323.5864 323.5864 323.5864 323.5864Value 449627 435439 384479 345132 602967Share price 2120.882 2053.9 1813 1627 2844

The sensitivity Analysis was done by varying the Growth rate of the FCF and the WACC of the company.

As the Growth Rate increases the Value of the Firm increases As the WACC increases the value of the firm increases

Annexure 1: BALANCE SHEET


Sources Of FundsTotal Share Capital 3,236.00 3,232.00 3,229.00 3,271.00 3,273.00Equity Share Capital 3,236.00 3,232.00 3,229.00 3,271.00 3,273.00Share Application Money 17 17 25 0 9Preference Share Capital 0 0 0 0 0

Reserves2,12,923.

001,93,842.

001,75,711.

001,59,698.

001,42,800.

00

Net worth2,16,176.

001,97,091.

001,78,965.

001,62,969.

001,46,082.

00

Secured Loans 2,036.0010,744.0

0 2,422.00 6,949.0010,104.0

0

Unsecured Loans87,105.0

074,737.0

052,101.0

051,678.0

053,324.0

0

Total Debt89,141.0

085,481.0

054,523.0

058,627.0

063,428.0

0

Total Liabilities3,05,317.

002,82,572.

002,33,488.

002,21,596.

002,09,510.

00

Application Of Funds

Gross Block2,05,638.

001,94,542.

001,87,607.

001,82,946.

002,03,686.

00Less: Revaluation Reserves 0 0 1,055.00 3,127.00 5,467.00Less: Accum. Depreciation

91,075.00

85,136.00

77,859.00

69,223.00

60,979.00

Net Block1,14,563.

001,09,406.

001,08,693.

001,10,596.

001,37,240.

00Capital Work in Progress

75,753.00

41,716.00

19,116.00 7,754.00

12,228.00

Investments1,12,573.

0086,062.0

052,509.0

054,008.0

037,652.0

0

Inventories36,551.0

042,932.0

042,729.0

035,955.0

029,825.0

0

Sundry Debtors 4,661.0010,664.0

011,880.0

018,424.0

017,442.0

0Cash and Bank Balance

11,571.00

36,624.00

49,547.00

39,598.00

27,135.00

Total Current Assets52,783.0

090,220.0

01,04,156.

0093,977.0

074,402.0

0

Loans and Advances42,113.0

040,179.0

032,982.0

025,678.0

017,730.0

0Fixed Deposits 0 0 0 0 0Total CA, Loans & Advances

94,896.00

1,30,399.00

1,37,138.00

1,19,655.00

92,132.00

Deferred Credit 0 0 0 0 0

Current Liabilities86,210.0

080,844.0

079,620.0

066,159.0

065,141.0

0


Provisions 6,258.00 4,167.00 4,348.00 4,258.00 4,601.00Total CL & Provisions

92,468.00

85,011.00

83,968.00

70,417.00

69,742.00

Net Current Assets 2,428.0045,388.0

053,170.0

049,238.0

022,390.0

0Miscellaneous Expenses 0 0 0 0 0

Total Assets3,05,317.

002,82,572.

002,33,488.

002,21,596.

002,09,510.

00

Contingent Liabilities80,641.0

075,955.0

054,600.0

054,075.0

056,305.0

0Book Value (Rs) 668.05 609.78 554.22 498.21 446.25

Annexure 2: PROFIT AND LOSS STATEMENT


Income

Sales Turnover3,40,814.

004,01,302.

003,71,119.

003,39,792.

002,58,651.

00

Excise Duty11,738.0

011,185.0

010,822.0

0 9,888.0010,481.0

0

Net Sales3,29,076.

003,90,117.

003,60,297.

003,29,904.

002,48,170.

00Other Income 8,721.00 8,936.00 7,998.00 6,192.00 3,052.00Stock Adjustments -1,943.00 -412 3,317.00 872 3,243.00

Total Income3,35,854.

003,98,641.

003,71,612.

003,36,968.

002,54,465.

00Expenditure

Raw Materials2,67,834.

003,34,283.

003,10,428.

002,79,737.

001,98,076.

00

Power & Fuel Cost12,299.0

010,153.0

0 7,166.00 4,094.00 2,255.00Employee Cost 3,686.00 3,370.00 3,354.00 2,862.00 2,624.00Other Manufacturing Expenses 2,692.00 1,985.00 2,258.00 2,731.00 2,612.00Selling and Admin Expenses 0 0 0 0 0Miscellaneous Expenses 9,020.00 9,037.00 9,621.00 7,733.00 7,720.00


Preoperative Exp Capitalised 0 0 0 0 0

Total Expenses2,95,531.

003,58,828.

003,32,827.

002,97,157.

002,13,287.

00

Operating Profit31,602.0

030,877.0

030,787.0

033,619.0

038,126.0

0

PBDIT40,323.0

039,813.0

038,785.0

039,811.0

041,178.0

0Interest 2,367.00 3,206.00 3,036.00 2,667.00 2,328.00

PBDT37,956.0

036,607.0

035,749.0

037,144.0

038,850.0

0

Depreciation 8,488.00 8,789.00 9,465.0011,394.0

013,608.0

0Other Written Off 0 0 0 0 0

Profit Before Tax29,468.0

027,818.0

026,284.0

025,750.0

025,242.0

0Extra-ordinary items 0 0 0 0 0PBT (Post Extra-ord Items)

29,468.00

27,818.00

26,284.00

25,750.00

25,242.00

Tax 6,749.00 5,834.00 5,281.00 5,710.00 4,956.00

Reported Net Profit22,719.0

021,984.0

021,003.0

020,040.0

020,286.0

0

Total Value Addition27,697.0

024,545.0

022,399.0

017,420.0

015,211.0

0Preference Dividend 0 0 0 0 0Equity Dividend 2,944.00 2,793.00 2,628.00 2,531.00 2,385.00Corporate Dividend Tax 615 475 447 410 387Per share data (annualised)Shares in issue (lakhs)

32,356.89

32,319.02

32,286.63

32,710.59

32,733.74

Earning Per Share (Rs)

70.213794 68.02 65.05 61.26 61.97

Equity Dividend (%) 100 95 90 85 80Book Value (Rs) 668.05 609.78 554.22 498.21 446.25

CONCLUSION:

RIL`s main strategy is to grow, by leveraging its existing asset base and seek investing in opportunities that is strategic to its existing business. The company initially focused on activities and investments in India to take advantage of the huge domestic market. After attaining the leader position here, they have rolled out their operation on a global scale. All over the years, it is obvious that it will not invest unless the investment creates value for its shareholders.


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