Mumbai: Analysts tracking India’s most valuable company, Reliance Industries Ltd (RIL), have called for improved transparency in how the company operates as well as greater clarity and disclosures in its reporting.
In the backdrop of the Satyam fraud and days ahead of RIL’s announcement of its third quarter results, billed by many as its toughest ever, at least half a dozen analysts Mint spoke to voiced concerns on several aspects of the company’s operations and financials that they have sought to understand better by asking the company for more information, but without success.
Reliance Industries is India’s second largest refiner and its biggest petrochemicals manufacturer. It also has interests in oil and gas exploration and production, polyester products and retail. It generates huge investor, analyst and media interest. And while analysts concede that the company may not be able to share all the details because of strategic or competitive reasons, they say it can improve its current record in addressing queries.
A 13 January report by Kotak Securities Ltd, authored by analysts Sanjeev Prasad and Gundeep Singh, echoes this sentiment. There would be “significant value in the stock at current levels if the management can improve disclosures and conclusively address some of the gaps between the Street’s understanding of its reported financials and reported financials,” Prasad and Singh wrote.
Responding to a questionnaire emailed to the company on Monday evening, a spokesperson for RIL declined comment.
The Kotak analysts added that the company’s stock hasn’t accounted for any value from new exploration and production discoveries because investors don’t have sufficient information on these.
The Mukesh Ambani-led RIL is believed to have made significant oil and gas discoveries in at least four places on the country’s east coast that rival in terms of reserves the company’s D6 block of the Krishna-Godavari basin. RIL’s revenues are expected to get a boost when it starts pumping gas from the KG basin in the second half of February.
RIL’s global partners in these blocks—Niko Resources Ltd and Hardy Oil and Gas Plc.—have been bullish on the potential reserves, but RIL has so far kept mum about these prospects.
Pointing to “significant scope...(in increasing) disclosures and avoid potential corporate governance issues”, the Kotak report said: “RIL, as the largest private sector company on all parameters, would do well to take the lead in restoring faith in ‘Corporate India’,” a reference to the happenings at Satyam Computer Services Ltd whose future is uncertain and which is being investigated by several regulatory agencies after its founder revealed on 7 January that he had, over the years, fudged the company’s books to the tune of at least Rs7,136 crore.
Another analyst with a foreign brokerage firm agreed with the Kotak analysts.
“That is a valid point. RIL does not share information easily. You will never understand their numbers fully because they will hold something back,” the analyst said over phone on Monday, asking not to be named. “How do they manage to report such high gross refining margins every time? From where all do they buy the crude (oil)? Where all is their product sold, with product-wise revenue break-up?”
For nearly two decades, RIL has foxed experts, forcing analysts tracking the company to redo their math in trying to predict its business model, by repeatedly performing better than analyst projections.
“I’m getting used to getting surprised,” said a second analyst who tracks the company and who, too, did not want to be identified.
Suggesting how these “gaps in understanding” could be addressed, Prasad and Singh wrote that RIL should collapse the group into one listed entity, give segment-wise sales volumes and revenues of key products, consumption of key raw materials segment-wise, and adopt more conservative accounting practices.
Besides, RIL should also “provide information on financial gains/losses separately”, as it would help in understanding the company’s refining business profitability better, they added.
Also See Issues of concern (PDF)
“There is lack of transparency in the group as a whole. For example, what is the hedging position for the quarter? We also need inventory valuation in value and volume terms so that there is clarity on how the company is placing its bets,” said Maulik Patel, an analyst with domestic brokerage KR Choksey Shares and Securities Pvt. Ltd.
A third analyst, who works at a domestic brokerage, agreed financial information is “a pain point” in RIL’s case and mentioned how he didn’t know the quantity of refinery output the company kept aside for its internal consumption in the downstream Hazira cracker and Patalganga plants. He didn’t want to be identified.
Some analysts, however, see reason behind RIL’s unwillingness to share such details.
“The analysts will want more information and RIL would want to part with less for strategic reasons,” said a fourth analyst, who works for a Mumbai-based domestic brokerage and didn’t want to be identified. “It is the largest company and has consistently outperformed the market. There is a very high investor interest and, accordingly, there is a stronger quest for information. They may also be unable to share all as the business is so complex.
He added: “For a company to disclose so much, its peers should also be disclosing that much.”
Many analysts are hoping RIL will address at least some of their queries when it announces its results for the October-December quarter on Thursday.
A Mint poll of four brokerage firms has predicted third quarter net sales of Rs29,598 crore, down 14.43% from a year ago, and net profit of Rs3,003.53 crore, a fall of 22.63%, mainly on account of shrinking refining margins.
Crude oil prices have plummeted to $44-45 (Rs2,156-2,205) a barrel levels from an all-time high of $147 a barrel in July, while prices of key petrochemical products have decreased by up to 60%.
Worse, many sector experts see no sudden upturn in the cycle, and the going is expected to get worse before it gets better.
Amit Shah and Alok Deshpande, analysts with BNP Paribas Securities India Pvt. Ltd, said in a 15 January report that the third quarter “will test RIL’s ability to weather current slowdown”.
The report highlights the “possibility of inventory losses”, “oil production at KG D6 post the stoppage, update on gas pricing” and levels of “other income” from a warrant conversion by promoters who pumped in Rs16,842 crore.
RIL had to shut crude oil production from the KG basin after a pipe ruptured on 9 December, less than three months after the company started production. RIL was pumping out around 10,000 barrels per day of oil at the basin.
The pricing of RIL’s gas—the company’s next big revenue earner—as well the ability to sell it, depend on the outcome of a case in the Bombay high court, where the company is fighting Reliance Natural Resources Ltd, led by Mukesh Ambani’s estranged younger brother Anil Ambani.
Currently, the court has imposed a stay order on the sale of gas from the KG basin.
Harshad Katkar and Nirmal Raghavan of Swiss financial services firm UBS AG, in a 19 January note, calculated Reliance’s gross refining margins in the current fiscal year at $9.3 a barrel. This will slip to $9.2, $8.5 and $7.8 a barrel over the next three financial years, respectively, they wrote.
Reliance’s gross refining margin in 2007-08 was $12.9 a barrel.
Kotak has forecast RIL’s estimated refining margins in fiscal 2010 and 2011 at $6.7 per barrel ($9.4/barrel with use of gas for internal heating) and $6.9 per barrel ($9.5/barrel with use of gas for internal heating), respectively.
Besides, it remains to be seen how Reliance will manage to sell products from its new 580,000 barrels of crude a day refinery in Jamnagar in an oversupplied market. The refinery was commissioned in late December. Reliance Petroleum Ltd, a unit of RIL, said it plans to start selling fuel from this refinery in January.
RIL’s shares fell 3.84% to close at Rs1,182.40 each on Tuesday on the Bombay Stock Exchange, even as the exchange’s benchmark Sensex index fell 2.45%.
Bloomberg contributed to this story