Dated: 06 Apr 23
Company: Reliance Industries Ltd.
CMP: Rs. 2324.85

Introduction

In this article we will try to analyze Reliance Industries Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.

Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.

Leverage Ratios

Observations:

1. The company has managed to reduce its debt levels during this period.
2. It is maintaining a good interest coverage ratio, though it has not reached its pre COVID levels.

Operating Ratios

Observations:

1. Company had a stretch of negative working capital indicating that it had its current assets lesser than its current liabilities. This might be due to some short-term debts taken by the company during its expansion phase into telecom and retail sectors. The situation has changed now.
2. Total assets turnover ratio is almost one third of fixed assets turnover ratio indicating that there are a lot of assets with the company that do not directly contribute towards revenue.

Profitability Ratios

Observations:

1. Copany has managed to improve PAT while maintaining the same PAT margins.
2. Other ratios have not shown any significant improvement during the period.

Intrinsic Value

There were multiple occurrences of negative free cash flow during the period under observation. This is due to heavy capex incurred as a part of company’s planned expansion into telecom and retail sector. Here we have relied on revenue growth and shareholder’s equity growth to figure out the expected free cash flow for future and thus the intrinsic value of the company.

Assumptions:

• The increase in Shareholder’s equity is assumed to be Rs. 66927.23 Crores per year for the first five years and then Rs 33463.61 Crores from sixth to tenth year. The growth rate is projected based on the past growth of Shareholder’s equity (refer to figure below). In the past Shareholder’s equity has increased at the rate of Rs. 133854.46 Crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

• Terminal growth rate is assumed to be 0%.
• Discount rate is assumed to be 12%.
• Increase in Revenue is assumed to be Rs.31714.34 Crores per year for the first five years and then Rs 15857.17 Crores per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of Rs. 63428.69 Crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

• Free cash flow will be 7% of revenues in future as the capex reduces after the initial outlay.

Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free cash flows derived from growth in Shareholder’s Equity and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.

Shareholder’s Equity Growth Model

Intrinsic Value: Rs.590.43

Stock Entry price with 25% margin of safety: Rs.442.82

Revenue Growth Model

Intrinsic Value: Rs.729.77

Stock Entry price with 25% margin of safety: Rs.547.33

The average of the above two stock entry prices works out to be Rs.495.08. When the stock starts trading below this price it becomes attractive for long term investment.

Author

Jibu Dharmapalan

Fundamental Analyst
If You Like This Content 👇👇👇
Click Here To Join Us on Telegram For Free Live Interactive Discussion And Learning

Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.

References:

https://www.bseindia.com/stock-share-price/reliance-industries-ltd/reliance/500325/financials-annual-reports/

https://www.ril.com/InvestorRelations/FinancialReporting.aspx

More about the Company:

Board Of Directors

Click Here to go to Home Page