A day before its 41st annual general meeting (AGM), Reliance Industries Ltd’s (RIL’s) shares appreciated 2%, well above the rise in the Sensex. At the RIL AGM, investors will stay closely tuned for announcements on its telecom business (Reliance Jio Infocomm Ltd), if any. Timelines/statements pertaining to the FTTH (fibre to the home) and enterprise launch will be crucial to watch out for.
Here are some key elements from RIL annual report 2017-18:
(1) Taking stock of debt
RIL’s consolidated reported net debt increased 18% to ₹ 1.41 trillion. But net debt-to-equity rose marginally to 0.48 times from 0.45 times last year. However, net liabilities are much higher after taking into account a few other items—primarily creditors for capex (about ₹ 76,000 crore) and deferred spectrum liability ( ₹ 26,500 crore). Accordingly, net liabilities have risen to ₹ 2.49 trillion, reckon Somshankar Sinha, Piyush Nahar and Pratik Chaudhuri of Jefferies India Pvt. Ltd. The chart above has the details. Net liabilities may not fall as quickly as the Street expects, therefore denting its deleveraging thesis, pointed out Jefferies’ analysts in a report on 3 July.
(2) What about the cash?
The company’s net cash flow from operating activities increased 44% year-on-year to ₹ 71,459 crore. However, that was not enough to cover capex, which came in 31% lower than last year at ₹ 79,250 crore. Out of that, Reliance Jio’s capex stood at around ₹ 49,000 crore. Jefferies estimates RIL’s negative free cash flow to have come down to ₹ 19,800 crore in FY18 from ₹ 54,700 crore from FY17.
Over the last few years, RIL has been on a capex spree with expansion in the downstream oil businesses (refining and petrochemicals) and the launch of its telecom venture. Analysts, of course, hope the company’s capex requirements taper down as we go ahead. Investors would do well to watch how the capex trajectory pans out. Declining capex would support an improvement in its free cash flow.
RIL’s consolidated operating profit increased by 39% for FY18 over the same period last year to ₹ 64,176 crore. That’s commendable given its gargantuan size. Performance was helped by increased contribution from the consumer businesses (Reliance Jio and Reliance Retail) on a year-on-year basis. The company’s traditional petrochemicals and refining businesses too performed well on the back of expanded capacities, high operating rates and better cost competitiveness. Overall, reported profit after tax for FY18 increased 21% to ₹ 36,080 crore with high depreciation and interest expenses. Interest capitalized stood at ₹ 10,000 crore.
Further, consolidated return on average capital employed (RoACE), adjusted for capital work-in-progress and investments, fell to 12% from 13.1% in FY17, point out analysts from Kotak Institutional Equities. This is despite further improvement in stand-alone RoACE to 21% reflecting weaker contribution from subsidiaries, they add.
Also read: Post Reliance Jio, India’s mobile industry officially shrinks by a third
4) Consumer businesses to grab a larger bite of the pie in future
RIL defined its big ambitions for the consumer businesses—Reliance Jio and Reliance Retail. On the Ebitda (earnings before interest, tax, depreciation and amortization) front, “our aim is to have the consumer businesses contribute on par with the energy and materials business over the next decade, when we celebrate our Golden Jubilee," pointed out the company’s annual report.
5) What of the stock?
Investors have had a good run, led by optimism on the telecom business. Since the beginning of 2017, the RIL stock has risen a huge 83%, sharply outperforming the Sensex, which went up 34% during this time. Currently, the stock trades at about 14.3 times estimated earnings for FY19, suggesting most of the good news is baked into the price. From here onwards, Jio announcements and financial performance, decline in overall capex intensity, and better refining margin environment would keep sentiments favourable for the stock.