RELIANCE INDUSTRIES LTD (RELIANCE) as India's largest private company
Part 2: Stock analysis on $RELIANCE
Hello everyone,
as you requested, today comes the analysis on RELIANCE with focus on the stock. Before we start as always but my disclaimer first.
DISCLAIMER: This is not investment advice. It is also not an invitation to buy / sell financial products. I only describe my opinion here and you have your own responsibility towards your investments. So I also assume no liability.
Before you read this, you should read the first part of RELIANCE. Otherwise you might not follow this. Here is the link to part 1 and another company with an "interesting" dividend policy:
https://app.getquin.com/activity/oBHNOmzrZY?lang=de&utm_source=sharing
Let's start with a simple look at sales. It is expected that sales in 2023 will be 105 billion euros. In 2024, according to analysts, we will be at 109 billion euros. This results in growth of (see (3)):
1-(€109 billion / €105 billion) = 3.8%.
On the sales side, therefore, revenues are increasing, but sales are not defined as profit, only as a summary of volumes sold with their prices. No statement is made about the real net margins, profits etc. (see (2)).
Therefore, let's compare sales and net margin of 2023. Lt. (3) we see sales of 9,284.940 billion Indian rupees (105.15 billion euros) and recognize a net margin of 7.67%. What does this mean?
From the 9,284.940 billion Indian rupees, we expect net income to be IR 712.052 billion, so when we divide net income by revenue, we see a net margin of IR 712 billion / IR 9,284 billion = 7.67%, rounded. Thus, we know that RELIANCE will have 7.67% of sales left as net income in 2023. This is a very important parameter because it assesses the profitability of sales (see (1), (3)).
Unfortunately, a closer look reveals a rather negative assessment of 2023, as the net margin is at the mentioned 7.67% and represents the relative minimum in the period 2021-2025. From this, I conclude less productivity. Of course, questions now arise as to why I do not pay further attention to the return on sales.
After all, in contrast to the net margin, the return on sales is stable at 11.4% and is only minimally 0.1% below the prior-year figure. This is certainly not an uninteresting indicator, but as an investor I am primarily interested in the bottom line result after deducting ALL major cost factors. The net profit factor gives me more information on this than a mere EBT (Earnings Before Taxation).
So we see so far that 2023 is expected to go down in the books as tending to be a less productive year. Now, of course, it is important to look at maintaining the financial security of the company. A first indication of this is provided by the free cash flow conversion rate (cf. (4)), because this puts the proportion of freely available money (for dividends, investments, salary increases, etc.) in relation to EBITDA. This gives an indication of how much money from EBITDA is really freely available to the company (cf. ibid.).
Why is this important?
Essentially, it is crucial because an increase in current liabilities can make it mandatory to settle the debt, or in the case of non-current liabilities, the resulting interest burden can be reduced by paying it off early.
If we look at RELIANCE, the enormous importance of this thought process becomes apparent. The FCF conversion rate is assumed to be negative. Specifically, according to Marketscreener, we are at -17.9%. Since EBITDA is assumed to be positive at IR1,423.412 billion, only free cash flow can be negative. A look at (1) reveals just that - FCF is negative at IR - 254.411 billion. This means that RELIANCE is expected to have no new free cash in FCF in 2023. This tends to be critical against the background of a stated dividend of IR 8.76. Even if this is only 0.10€, it cannot be paid out of the FCF.
If we are interested in the total burden from this dividend, multiplying the shares issued by this dividend per share is a good way to do this. For simplification, we assume that each share is really entitled to a dividend. This results in a dividend burden of:
- 6,352,660,000 shares * 0.1 = €635,266,000
The dividend burden could therefore be €0.635 billion. If we again hold the sales against this, the result is a burden of:
- €0.635 billion / €10.53 billion = 6.03% charge on sales
In general, this seems to me to be bearable. What is less nice is the additional burden of net debt, which has been constant for years without being reduced and has been around IR 2,179,595 million to IR 2,301,270 million. So we can't really observe that the absolute number of liability is really reducing. Also the leverage as a result of debt / EBITDA indicates less debt compared to EBITDA, but still the absolute liability does not fall and instead even increases moderately (see (1)).
In this context, RELIANCE is expected to be able to generate a positive FCF again from 2024. RoE is also expected to increase from 7.82% (2022) to up to 9.24% (2024). Fundamentally desirable and certainly a conceivable path against the background of the massive increase in equity. However, a lot of goodwill is priced in here, and research via CAPEX spending, which is so important for the oil and gas industry, is unfortunately decreasing significantly in both absolute and relative terms (see (1), (3)):
- IR 1,001,450 million (2022) with CAPEX / SALES 14.3%.
Vs.
- 1,022,598 million IR (2025) with CAPEX / SALES 9.94%.
I deliberately pay attention to these research expenses, because as described in the first part, the RETAIL pillar of RELIANCE unfortunately cannot rely on fixed sales structures. Please also read this article again.
What remains of all this analysis?
As many know, I mainly do content on Getquin and YouTube around dividends, REITs, value stocks, etc. that may become interesting candidates for dividend payouts now or in the foreseeable future. For this, the following points are particularly important to me:
- Predictable revenue business (i.e. cyclical impact if any then only predictable).
- High barriers to entry (i.e., brand power, broad diversification of the company into sub-brands)
- The company pursues an UNDERSTANDABLE dividend strategy that matches the brand product (HUST Looking at you Intel HUST)
If we take note of that and look at cash flow per share and book value per share, we get useful input on what we're buying there in the stock market. While book value per share is up, cash flow per share is down from IR 238 to IR 202. This results in a reduction of potential dividend mass of:
1 - 202/238 = 15,12 %
If we calculate the value of the RELIANCE share via Graham formulas out of sheer niceness, the following theoretical growth results from a growth of IR 10,292,424 million in 2025 starting from IR 9,284,940 million in 2023:
((10292424/9284940)^(1/3))-1 = 3,49%
A comparison with the broad Indian oil market indicates a general growth of 17.2% per year on average - BUT this is a general estimate. RELIANCE has several sub-sectors within it, so both refining and oil/gas exploration must be included in the valuation.
What's the point of the detail?
The projected growth of these sectors is 22% growth for Refining in India and -12% for Exploration. For this reason, I would like to estimate the growth at the 3.49% (see (6), (7)). We get:
EPS * (8.5 + 2 * growth factor) = 105 * (8.5+2*3.49) = IR 1,625.40.
For the maximum purchase price, I arrive at:
=(22.5*105*1251])^(1/2) = 1719.15 IR
The share should cost: IR 2,378.90
This gives me a slight overvaluation of:
1-(2.378,90 / 1.625,40) = 46,36%
Or rather.
1-(2.378,90 / 1.719,15) = 38,38%
This tends not to speak for the value or dividend character of the share.
Furthermore, the P/B ratio indicates that we are currently still pricing in around 2 times the book value per share - with what qualitative justification?
We can therefore already foresee that the company may not have the most stable future prospects. Sales, EBITDA and net income may increase, but I currently see no reason for me to compulsively buy into the company. The following points in particular are unclear to me:
- What measures are being taken to counter the drop in productivity?
- How are the RELIANCE stores supposed to become competitive with the Kiran stores in the future?
- Where is the dividend heading? It is currently below 0.36
- What is the main alternative to the collapsing oil business?
...
As long as the expansion course is driven in such an unbalanced way, RELIANCE is not interesting for my dividend portfolio.
In principle, however, it is an interesting emerging market stock - however, it is irrelevant for my investment strategies of the dividend/value or tech portfolio. The positive analyst estimates, however, include other investment strategies and evaluate RELIANCE in the long term according to other aspects than I do. However, a look at 2021 clearly shows that the market sentiment of analysts was already much less positive then than it is today (see (1), (7)).
It is therefore more of a speculative EM bet that does not match my interests as stated. Neither am I offered an appealing dividend, nor do I recognize a transparent transformation process.
What do you think about RELIANCE? Are you invested? Am I seeing it right or too harshly? Feel free to write it to me in the comments.
If you are interested in another company with a dubious dividend policy from my point of view, feel free to check out my Intel update on my stock analysis!
P.S. : IQ 5.000 who understands the choice of the GIF.
Your Bass-T
#indien
#reliance
#etfs
#dividende
#aktienanalyse
Sources
(1) https://de.marketscreener.com/kurs/aktie/RELIANCE-INDUSTRIES-LTD-9058833/
(2) https://wirtschaftslexikon.gabler.de/definition/umsatz-48634
(3) https://de.marketscreener.com/kurs/aktie/RELIANCE-INDUSTRIES-LTD-9058833/fundamentals/
(4) https://www.wallstreetprep.com/knowledge/free-cash-flow-conversion-rate-fcf/
(5) https://exporo.de/wiki/return-on-equity/
(6) https://simplywall.st/markets/in/energy/oil-gas
(7) https://de.marketscreener.com/kurs/aktie/RELIANCE-INDUSTRIES-LTD-9058833/analystenerwartungen/
