While analysts are cheering trying to justify why Reliance
Industries stock price should get re-rated, I found the balance sheet which was with the result release to be quite scary. I have encircled the items which
seems to be looking not good for the shareholders:
Current Asset to Current Liabilities, which
measure the liquidity position of a company stood at 0.58 in Sep 2017 vs 0.62 in March 2017. Any figure which is less than 1 is not very healthy. It is approaching
half which in my view is a cause of worry.
Very Low Interest Payout: Non current and current financial
liabilities (including trade payable) put together is roughly 3.99 lakh crores
while the interest outgo in the second quarter of FY-18 was only 2272 crores
which is just 0.57% for 3 months. No body gets loan at less than 2.3% per
annum. So the interest outgo is bound to go up very significantly in coming
years when the interest capitalization is stopped and the trade payable(> 84000 crores) are
paid / reduced.
Huge amount of goodwill, intangible assets
and intangible assets WIP at roughly 1.08 lakh crores out of total non-current
assets of 5.9 lakh crores (>18%)
Liabilities to equity ratio at at 1.7 times
is also quite high considering the size of the balance sheet which has crossed
7.5 lakh crores
Net Profit optically high due to very low depreciation charges: Total non current assets excluding financial
assets stands at roughly 5.58 lakh crores. Depreciation and amortization charged
in the current quarter was 4287 crores which was just 0.77% for the quarter.
Its very hard to get my head around how reliance is charging depreciation &
amortization at the rate of 3% per annum when spectrum itself is given for 20 years. So this item is also going to expand
significantly when assets are fully capitalized.
So in my view the financial position of the company is not
in such a good shape as it was few years back. The balance sheet has become bloated
and the company will incur huge interest and depreciation & amortization
charges in FY-19 and FY-20 which will significantly reduce the net profits of
the company going forward. So the investors should be very cautious and do not
chase the stock on analyst recommendations.
RIL Q2 Result Release: http://www.bseindia.com/xml-data/corpfiling/AttachLive/bd036752-06c7-43f5-8380-2816a357c6ad.pdf
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