Will RIL Meet Its Guidance?

DSIJ Intelligence / 08 Jun 2012

Yesterday, India’s largest company by market cap, Reliance Industries (RIL), had its 38th annual general meeting (AGM) for its shareholders.
Yesterday, India’s largest company by market cap, Reliance Industries (RIL), had its 38th annual general meeting (AGM) for its shareholders. There were days when RIL used to be a shining star in any investor’s portfolio. However, from 2008 onwards it has lost its sheen. It has consistently been a wealth destructor for the investors, which is evident from the fact that in CY08 it gave a negative return of around 16.6 per cent, in CY09 a negative return of 12 per cent, in CY10 a negative return of 3 per cent and in CY11 it posted a negative return of 35 per cent. However, in the current year CY12 it is up marginally by 3 per cent.

Shareholders expected some sort of relief and proper guidance from the company in its AGM for their confidence to be regained. Matching this mood, Mukesh Ambani announced some big moves and major expansion plans for the company going ahead. The following are the key points which should be noted by the investors. 
• RIL will invest Rs 1,00,000 crore in the next five years.
• The management expects the operating profit to double in five years.  
• Gas output is expected to be strong going ahead. The KG D6 output target is set at 60 million cubic meters a day 9 (mmscmd) in the next two to three years. 
• Shale gas production, currently at 30 billion of cubic feet, is expected to grow ten times over the next five years.
• The retail segment, currently not doing well, is also expected to grow significantly and be profitable within three years. The company aims sales of around Rs 40,000 to Rs 50,000 crore via retail operations in the next three to four years. 
• RIL has bought back 2.7 crore shares so far and has spent Rs 1,929 crore for the same. This works out to be an average buy-back share price of around Rs 714 per share, which is almost the same as its current market price.
• Projects in certain segments like petrochemicals and refinery downstream will go live over the next two to three years, which will further help the margins to expand going ahead. 
• Its partnership with BP will bring in new technology and further the company is working closely with BP to solve reservoir-related issues.   

The basic question that arises after reading this is that should investors buy RIL on the back of a big-bang expansion plan and strong management guidance? Our answer would probably be in the negative.

We believe that RIL is surrounded by a whole lot of headwinds and it will be very difficult for the big boy to solve its issues quickly. In the refining segment, RIL’s gross refining margin is on a declining trend (except in the March quarter wherein it showed improvement) and this is a major issue for the company. In the recent past it has posted GRMs lower than Singapore GRMs which should be considered as the worst for the company. 

Further, the weak demand from the petrochemical segment would affect the company’s growth prospects. One of the major segment i.e. oil & gas is facing issues in terms of gas output which is showing a southward movement. The management’s KG D6 output target is set at 60 million cubic meters a day (mmscmd) in the next two to three years but the media reports in the recent past have stated that the government expects the gas output to fall to 20 mmscmd by 2015. Its ambitious efforts to venture into new areas of business like financial services, telecom, retail and hotels have neither excited investors nor created alpha for the shareholders. 

The guidance which the management gave in the AGM also had no clarity as to how the things will pan out. The management said that the company would invest Rs 1,00,000 crore in the next five years but in which segment and how much remains unclear. Further, there is no idea on how much return will it generate for the investors. In the retail segment it aims of achieving revenues of around Rs 40,000 crore. However, that’s a tall order to execute. Despite putting a lot of thrust in the past few years, the retail business has not generated much growth. Further, no guidance was given as to when will its retail segment break even and become profitable for the company.  Also, there was was no clarity given for the telecom and hotel segments. All the futuristic guidance is given well, but the question is that how much will the company be able to actually achieve?

We believe that providing strong guidance is just one part of the entire business game and what is more important is the practical aspect of how it goes about realising its targets. Looking at the current business environment, the management’s targets will attract skepticism. We believe one should avoid the counter till the macro and micro environment of the company gets sorted out.

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