Investors trooped into Reliance Industries Ltd’s (RIL’s) 38th annual general meeting (AGM) hoping for clarity on several issues plaguing the firm and battering the stock, making it underperform the benchmark Sensex for several years now.
Chairman and managing director Mukesh Ambani did make some attempts to boost investor confidence in his speech at the meeting.
Let’s consider some of the announcements. It’s well known that one of the key concerns for the stock has been the company’s inability to put to use the huge cash pile on its books. Ambani said that over the next five years, his firm will invest Rs 1 trillion. Unfortunately, analysts say the investment plan doesn’t have enough details and it could have been bolder.
That’s because RIL’s consolidated net cash from operating activities stood at Rs 24,483 crore at the end of fiscal 2012 (FY12). Assuming the company invests Rs 20,000 crore each year and assuming the net cash from operating activities remains at least that much each year, it will still be left with a surplus.
Of course, chances are net cash from operating activities will increase, as the company also intends to double its operating profit over the next five years. And RIL had cash and cash equivalents to the tune of Rs 70,252 crore as on 31 March.
What will perhaps satisfy investors is announcements of specific investments in large projects. While Ambani did assure that the investments will happen, he did not announce any clear plan or a break-up of the investments for the entire amount, apart from what was already known earlier.
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Nor did he outline the plans for the company’s telecom business, which is likely to disappoint investors, given the travails the industry is going through and given Bharti Airtel Ltd’s recent acquisition of Qualcomm Inc.’s India unit.
On the retail front though, the company has targeted a growth of five-six times in its existing revenue and hopes to achieve Rs 40,000-50,000 crore over the next three-four years. That was an attempt to provide some guidance, given investors’ concerns about RIL’s ability to prove itself in its “non-core” businesses.
One of the most positive announcements in the speech, however, is the outlook on the oil and gas business, where Ambani said that in the next three-four years, gas production will be almost doubled over a sustained period, subject to necessary approvals. To be fair, RIL has been quite vocal recently about the problems faced by it at the D6 block in the Krishna-Godavari basin and the transparency has gone down well with analysts.
Unfortunately though, the fact remains that triggers for the stock to outperform in the near term are few and far between. The operating environment is challenging and the company’s profitability is increasingly being driven by other income rather than any of its core businesses—refining, petrochemicals or oil and gas.
In the March quarter, other income was more than the earnings before interest and tax of any of its three businesses. Worse still, analysts expect the trend to continue and the quantum of other income is expected to increase in future. The short-term outlook for the petrochemicals and refining businesses isn’t too rosy either.
“At CMP (current market price), we believe too much pessimism is built in the RIL stock,” wrote analysts from IDFC Securities Ltd in a note to clients commenting on the AGM’s highlights.
“However, we were disappointed at the lack of guidance on the dividend policy or buy-back (only around 22% of the buy-back target of about Rs.10,000 crore met to date, though the stock fell by almost 11% since the announcement), as our estimates point to a surplus FCF (free cash flow) of $10 billion (around Rs 55,000 crore today) over FY13-15, despite factoring in a robust capex of $4.5 billion annually (in line with the management guidance).”
The lukewarm reception to Ambani’s speech was evident. RIL’s stock rose 0.9% to Rs 721 on a day the benchmark Sensex gained 1.2%.