Mumbai: The financials of Reliance Industries Ltd (RIL), India’s largest company by market capitalization, have been queried in a recent report by Kotak Securities Ltd over “aggressive accounting policies”.
The Mukesh Ambani-controlled RIL has maintained that it is fully compliant with all standard accounting norms, an assertion that the 23 October report by the Mumbai-based brokerage agrees with, while asking for greater clarity on the capitalization of certain expenses that “buoy profits” and an additional Rs600 crore that was paid out to private firms of RIL’s “major shareholder”.
Kotak analysts Sanjeev Prasad, Gundeep Singh and Tarun Lakhotia wrote that while treating certain expense heads as capital expenditure—billed as “capitalization”—is in line with accounting standards, it “raises issues about quality of RIL’s earnings versus other companies in India and globally that follow more conservative policies”.
Large investment: Reliance Industries’ Jamnagar refinery in Gujarat. AFP
Kotak has a “sell” rating on the stock with a target share price of Rs1,750. RIL fell 1.56% to close at Rs2,015.45 on Monday on the Bombay Stock Exchange even as the exchange’s benchmark equity index, the Sensex, dropped 0.42% to close at 16,740.50.
RIL has capitalized Rs3,070 crore as project-development expenses in fiscal 2009, up from Rs97.10 crore in the year earlier; Rs3,400 crore of interest expense, up nearly fourfold from Rs880 crore; and Rs10,900 crore as losses from foreign exchange transactions, up from Rs45.30 crore, Kotak analysts said, citing the company’s annual report.
While these are all lawful and permissible classifications, “they do buoy RIL’s profits relative to other companies”, said Prasad, Singh and Lakhotia, adding that they “would welcome clarifications” on the spike in sums set aside as capex.
RIL attributes much of this to the corporate restructuring that led to the company merging its refining subsidiary Reliance Petroleum Ltd (RPL) with itself early this year and the start of its two massive capital- intensive projects in 2008-09.
“The impact of two large investment projects, including the new (580,000 barrel a day) refinery at Jamnagar as also the gas production facility at KG D6 coming on stream, has resulted in the significant increase in the capitalization of project expenses and interest,” an RIL spokesman said in an email to Mint. KG D6 refers to the D6 block in the Krishna-Godavari basin.
Calls to one of RIL’s auditors D. Chaturvedi, who signed off on RIL’s annual report and is a partner in audit firm Chaturvedi and Shah, were not returned. “Over 84% of our borrowings are dollar-denominated and the increase in capitalization of the foreign exchange loss is an impact of the weakening of the rupee,” said the RIL spokesman, as an explanation for a figure that has seen an increase of 240 times within a year to Rs10,900 crore.
There have been earlier instances of analysts pointing to the lack of details and disclosures in the way the company operates its businesses across oil and gas exploration and production, polyester products and retail.
Mint had reported the gaps in analysts’ understanding of RIL’s accounts and disclosures on 6 February.
All of them then had spoken of their inability to ferret out information on certain key aspects of RIL’s operations that thwarted a thorough analysis, sometime or the other. Prasad of Kotak Securities was one of the analysts.
The recent Kotak report has also sought information on higher payments to firms owned by Ambani, RIL’s promoter and major shareholder, such as Reliance Utilities and Power Ltd, Reliance Utilities Pvt. Ltd, Reliance Ports and Terminals Ltd.
“We highlight Rs19.6 billion of fuel, power and water, and storage charges paid to companies of the major shareholder. In FY08, the corresponding amount was Rs13.7 billion,” says the Kotak note.
An RIL executive, who did not want to be named as he is not permitted to interact directly with the media, explained that the higher outgo was on account of the higher water, power and usage of other such facilities by the new Jamnagar refinery.
The brokerage note says, however, that “production volumes were largely constant in case of refining and lower in case of chemicals”.
This refinery was commissioned in December 2008, although full scale commercial operations started a few months later.
The Kotak analysts have also found unexplained additions to RIL’s assets of nearly Rs18,300 crore and “are surprised by the Rs455 billion increase in gross block since the two biggest projects—Reliance Petroleum refinery and KG D6 block—were not technically commissioned in FY2009”.
The company insists it has not flouted any accounting norm and the “gross block and capital work in progress as mentioned in the annual report captures the relevant impact of the merger of RIL and RPL”, according to its emailed response.