Ashish kumar verma

FM-Assignment -1

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FM-Assignment -1

INDEX

1. Executive Summary 3

2. Capital expenditure 7

3. Account balances for properties, plant and equipment 9

4. Capital structure 10

5. Beta measure 14

6. WACC 15

7. Debt / Equity ratio 18

8. Du Pont 21

9. Comments 24

10. References 32

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QUESTION-1

Executive summary of the company and the industry?

ANSWER-

Reliance Industries Limited is India's largest private

sector conglomerate (by market value) , with an annual turnover
of US$ 35.9 billion and profit of US$ 4.85 billion for the fiscal year
ending in March 2008 making it one of India's private sector Fortune
Global 500companies, being ranked at 206th position (2008). It was
founded by the Indian industrialist Dhirubhai Ambani in 1966.
Ambani has been a pioneer in introducing financial instruments like
fully convertible debentures to the Indian stock markets. Ambani was
one of the first entrepreneurs to draw retail investors to the stock
markets. Critics allege that the rise of Reliance Industries to the top
slot in terms of market capitalization is largely due to Dhirubhai's
ability to manipulate the levers of a controlled economy to his
advantage. Though the company's oil-related operations form the core
of its business, it has diversified its operations in recent years. After
severe differences between the founder's two sons, Mukesh
Ambani and Anil Ambani, the group was divided between them in
2006. In September 2008, Reliance Industries was the only Indian
firm featured in the Forbes's list of "world's 100 most respected
companies".
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Products & Brands

The Company's major products and brands, from oil and gas to textiles
are tightly integrated and benefit from synergies across the Company.
Central to the Company's operations is its vertical backward
integration strategy; raw materials such as PTA, MEG, ethylene,
propylene and normal paraffin that were previously imported at a
higher cost and subject to import duties are now sourced from within
the Company. This has had a positive effect on the Company's
operating margins and interest costs and decreased the Company's
exposure to the cyclicality of markets and raw material prices. The
Company believes that this strategy is also important in maintaining a
domestic market leadership position in its major product lines and in
providing a competitive advantage.

The Company's operations can be classified into four segments

namely:

• Petroleum Refining and Marketing business

• Petrochemicals business
• Oil and Gas Exploration & Production business
• Others

The Company has the largest refining capacity at any single location.

The Company is:

• Largest producer of Polyester Fibre and Yarn

• 4th largest producer of Polypropylene (PP) and Paraxylene (PX)
• 6th Largest producer of Purified Terephthalic Acid (PTA)
• 7th largest producer of Mono Ethylene Glycol (MEG)

Source: http://www.ril.com, http://en.wikipedia.org

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Indian Petroleum Industry

An Overview
The Indian oil and gas sector is one of the six core industries in India
and has very significant forward linkages with the entire economy.
India has been growing at a decent rate annually and is committed to
accelerate the growth momentum in the years to come. This would
translate into India's energy needs growing many times in the years to
come. Hence, there is an emphasized need for wider and more
intensive exploration for new finds, more efficient and effective
recovery, a more rational and optimally balanced global price regime -
as against the rather wide upward fluctuations of recent times, and a
spirit of equitable common benefit in global energy cooperation.

The Indian oil and gas sector is of strategic importance and plays a
predominantly pivotal role in influencing decisions in all other spheres
of the economy. The annual growth has been commendable and will
accelerate in future consequently encouraging all round growth and
development. This has necessitated the need for a wider intensified
search for new fields, evolving better methods of extraction, refining
and distribution, the constitution of a national price mechanism -
keeping in mind the alarming price fluctuation in the recent past and
evolving a spirit of equitable global cooperation. .

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Public Sector Undertakings

Oil & Natural Gas Corporation Limited (ONGC)

ONGC Videsh Limited (OVL)

Oil India Limited (OIL)

GAIL (India) Limited

Private Sector
Essar Oil

Source: http://www.indiainbusiness.nic.in (MINISTRY OF EXTERNAL AFFAIRS, GOVERNMENT OF

INDIA) http://en.wikipedia.org , http://business.mapsofindia.com

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QUESTION-2

How did the company spend on Capital expenditures for

each of the last five years? Were the capital expenditures
increasing or decreasing? Is their capital spending
consistence or erratic?

ANSWER-

A capital expenditure is an outlay of cash to acquire or upgrade a

business asset. Common examples of a capital expenditure include the
purchase of a new building or the cost of significant upgrades to an
existing facility. A capital expenditure is considered to be deductible,
because it represents an improvement to the business, and it is
deducted over the expected life of the item, rather than all at once as
in the case of repair or maintenance expenditures.

A capital expenditure is amortized over the length of the life of the

investment, which may range from an expectation of five to 40 years,
depending on the investment. This time period is known as a recovery
period, and recovery periods for major assets are set out so that
companies will know how to deduct capital expenditures. The
amortization means that the company cannot deduct the cost of the
capital expenditure all at once, and must instead spread it out over the
life of the investment.

Source: http://www.wisegeek.com , http://en.wikipedia.org

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(In Rupees Crores)

YEAR CAPITAL EXPENDITURE COMPARISON WITH

Incurred PREVIOUS YEAR
2005-06 5,379.01 24.54 %
2006-07 12,184.04 126.51 %
2007-08 30,162.39 147.56 %
2008-09 26,437.82 (- ) 12.35 %
2009-10 71,964.11 172.20 %

The capital expenditure of Reliance Industries is increasing for 4 years

but has decreased for 1 year. Also, we can say that the capital
expenditure spending is quite erratic as it is rising by as high as 172 %
in one year and decreasing by 12 % in one year. So , it is quite erratic.

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QUESTION-3

What are the account balances for properties, plant and

equipment for the five most recent years? What percent of
properties, plant and equipment does the company replaces
every year?

ANSWER-

(In Rupees Crores)

YEAR PROPERTIES PERCENTAGE PLANT,MACHINERY, PERCENTAGE

REPLACED AND EQUIPMENT REPLACED
2005- 2768.32 13.56 % 25740.31 (-) 6.16 %
06
2006- 3752.36 35.55 % 50171.31 94.91 %
07
2007- 6201.34 65.27 % 55608.98 10.84 %
08
2008- 6726.62 8.47 % 53392.59 (-) 3.99 %
09
2009- 7799.38 15.95 % 82,461.22 48.50 %
10

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QUESTION-4

Comment on the capital structure of the company. Compare

the capital structure of the selected company with that of
five other companies in the same industry.

ANSWER-
(In Rupees Crores)

CAPITAL STRUCTURE OF RELIANCE

INDUSTRIES
Debt Equity%
YEAR Debt Equity Total %
36.90 63.10
2009-10 73,904.48 126372.97 200277.45 % %

(In Rupees Crores)

CAPITAL STRUCTURE OF HINDUSTAN

PETROLEUM CORPORATION (HPCL)

Debt Equity
YEAR Debt Equity Total % %

22,755.1 67.9 32.05

2009-10 7 10,730.63 33485.80 5% %

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(In Rupees Crores)

CAPITAL STRUCTURE OF INDIAN OIL

CORPORATION (IOC)

Debt Equity
YEAR Debt Equity Total % %

44,972.0 50.5 49.46

2009-10 6 44,003.26 88975.32 4% %

(In Rupees Crores)

CAPITAL STRUCTURE OF BHARAT PETROLEUM

CORPORATION (BPCL)

Debt Equity
YEAR Debt Equity Total % %

21,171.4 63.5 36.42

2009-10 1 12,128.11 33299.52 8% %

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(In Rupees Crores)

CAPITAL STRUCTURE OF ESSAR OIL

Debt Equity
YEAR Debt Equity Total % %

10,031.7 73.6 26.31

2009-10 1 3,582.01 13613.72 9% %

(In Rupees Crores)

CAPITAL STRUCTURE OF MANGALORE

REFINERY AND PETROCHEMICALS (MRPL)

Debt Equity
YEAR Debt Equity Total % %

1,986.8 29.5 70.42

2009-10 0 4,729.40 6716.2 8% %

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CAPITAL STRUCTURE OF RELIANCE INDUSTRIES & 5 OTHER

COMPANIES

COMPANY NAME CAPITAL STRUCTURE

Reliance Industries Limited Debt 36.90 % & Equity 63.10

%

Indian oil corporation (IOC) Debt 50.54 % & Equity

49.46 %

Bharat petroleum corporation Debt 63.58 % & Equity 36.42

(BPCL) %

Essar Oil Debt 73.69 % & Equity 26.31

%

Mangalore refinery and Debt 29.58 % & Equity 70.42

petrochemicals (MRPL) %

Hindustan petroleum Debt 67.95 % & Equity 32.05

corporation (HPCL) %

The Capital Structure of Reliance consists of Debt 36.90 % & Equity

63.10 %. It is quite normal but the company could have increased the
capital structure to near about 50-50 % to take full advantage of
Interest Tax Shield . The capital structure of the other 5 companies
varies from minimum Debt % 29.58 % of Mangalore refinery and
petrochemicals (MRPL) to maximum 73.69 % of Essar Oil. In this
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case, the Essar Oil has highly leveraged capital structure and
Mangalore refinery and petrochemicals (MRPL) has a low leveraged
capital structure.

So, in this case, the capital structure of Reliance Industries is normally

leveraged . The company can further increase its debt in case it
requires more investment for further expansion. So, in that case, the
company will have a more leveraged capital structure which will be
more ideal.

Source: www.moneycontrol.com

QUESTION-5
What is the beta measure of the company?

ANSWER-

The Beta Measure of Reliance Industries is 1.10 .

Source: www.bseindia.com

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QUESTION-6

Calculate the weighted average cost of capital (WACC) of

the company.

ANSWER-

WACC OF RELIANCE INDUSTRIES:

The weighted average cost of capital is defined by:

Where,

The following table defines each symbol:

Symbol Meaning Units
C weighted average cost of capital %
Y required or expected rate of return on equity, or cost of equity" %
B required or expected rate of return on borrowings, or cost of debt %
t corporate tax rate %
ͨ
D total debt and leases (including current portion of long-term debt and currency
notes payable)
E total market value of equity and equity equivalents currency
K total capital invested in the going concern currency

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AS PER DIVIDEND DISCOUNT MODEL:

Dividend Paid for year 2009-10 = Rs. 1,908.47 Crores

Equity of Reliance Industries = Rs. 126372.97 crores

Retention Ratio: {1- (Dividend Paid/Equity)}

= {1-(1908.47/126372.97)} = 0.985

Growth Rate: Retention Rate * ROE = 0.985 * 12.11 = 11.93

Dividend per share = Rs. 13

Cost of Equity = {D(1+g)}/(r-g)=Avg Market Price

= {13(1+11.93)}/(r-11.93) = 1782.37

= 12.02 %

Thus, WACC of Reliance Industries AS PER DIVIDEND DISCOUNT MODEL is 12.02 %

Risk Free Return = 8.0312

SOURCE: AS PER RBI 11 March 2010

Market Risk Premium = 5.3

SOURCE: AS PER DEUTSCHE BANK 10 FEBRUARY 2010

Beta of Reliance Industries = 1.10

SOURCE: AS PER www.bseindia.com

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Cost of Equity = Risk Free Return + Market Premium*Beta

= 8.0312 + 5.3*1.1 = 8.0312 + 5.83

= 13.8612 %

Debt = Rs. 73,904.48 Crores

Interest = Rs. 1,816.27 Crores

Cost of Debt = 1816.27/73904.48 = 2.46 %

WACC = (126372.97/200277.45)*0.138612 + (73904.48/200277.45)*0.0246*(1-0.3399)

WACC = 0.0874 + 5.99 = %

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QUESTION-7

What are the five year high and five years low for the
company’s debt ratio? Compare the debt equity ratio of the
selected company with that of five other companies in the
same industry.

ANSWER-

(In Rupees Crores)

DEBT EQUITY RATIO OF RELIANCE INDUSTRIES

YEAR Debt Equity DE Ratio

2005-06 18784.59 40403.32 0.46
2006-07 21865.61 49804.26 0.44
2007-08 27825.73 63967.13 0.44
2008-09 36,479.68 81,448.60 0.45
2009-10 73,904.48 126372.97 0.58

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DEBT EQUITY RATIO OF RELIANCE INDUSTRIES & 5 OTHER

COMPANIES

YEAR Reliance IOCL BPCL Essar MRPL HPCL

Industries Oil

2005- 0.46 0.67 0.61 2.13 1.61 0.26

06

2006- 0.44 0.90 0.92 2.41 1.39 0.76

07

2007- 0.44 0.78 1.05 2.86 0.87 1.10

08

2008- 0.40 0.86 1.29 2.90 0.55 1.59

09

2009- 0.58 1.02 1.75 2.87 0.42 2.12

10

Debt/Equity Ratio is a measure of a company's financial leverage

calculated by dividing its total liabilities by stockholders' equity. It
indicates what proportion of equity and debt the company is using to
finance its assets. A high debt/equity ratio generally means that a
company has been aggressive in financing its growth with debt. This
can result in volatile earnings as a result of the additional interest
expense.

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Whereas a low ratio indicates that the utilization of the leverages is not
done properly by the company. In case of Reliance, it’s debt-equity
ratio is very normal. It shows the riskiness of the business in this
years. But good returns has never made debt a worry for Reliance.

The 5 year High of Debt/Equity ratio of Reliance Industries is 0.58.

The 5 year Low of Debt/Equity ratio of Reliance Industries is 0.40.

By comparing the DEBT/EQUITY ratio of Reliance Industries with other

5 companies, we can see that this ratio is very less for Reliance
Industries and it can further leverage more debt and use the cheaper
source of financing and be more profitable.

Source: www.moneycontrol.com

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QUESTION-8

Construct Du Pont identity for the company?

ANSWER-

DU PONT CHART FOR RELIANCE INDUSTRIES 2009-10

RETURN ON EQUITY

12.14 %

RETURN ON ASSETS ASSETS/EQUITY

Multiplied By
6.26 = 245705.65/126372.97

= 1.94

PROFIT MARGIN TOTAL ASSETS TURNOVER

Multiplied By
10.79 0.58

SALES NET INCOME SALES TOTAL ASSETS

141847.47 15309.32 141847.47 245705.65

Subtracted From Divided By 21

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(In Rupees Crores)

2009- 2008- 2007- 2006- 2005-06

10 09 08 07

245705 14983 117353. 93095.

Total Assets .65 8.91 28 17 80586.25

Sales 141847 13344 111692. 81211.

Turnover .47 3.00 72 33 66051.30

Reported Net 15309. 19458. 9069.3

Profit 32 29 11943.4 4 7571.68

Preference
Dividend 0.00 0.00 0.00 0.00 0.00

126372 81448. 63967.1 49804.

Networth .97 60 3 26 40403.32

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2009- 2008- 2007- 2006- 2005-

DuPont Analysis: 10 09 08 07 06

Total asset turnover

(total Sales/Total 0.58 0.89 0.95 0.87 0.82

Assets)

Net Profit Margin

(PAT&Pref Div/Total 10.79 14.58 10.69 11.17 11.46

Sales)

Return on Total
Assets(ROA)
6.26 12.98 10.16 9.72 9.40
(Net profit margin*Total
Asset Turnover)

Financial Leverage
Multiplier(FLM)
1.94 1.84 1.83 1.87 1.99
(Total Assets/Common
Stock Equity)

Return on Equity(ROE)
12.14 23.88 18.59 18.18 18.71
(ROA*FLM)

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QUESTION-9

Comments on the Following:

1) Working capital position

(In Rupees Crores)

NET WORKING CAPITAL TURNOVER RATIO

YEAR Net Working Sales Net Working

Capital Capital TR

2005-06 11320.99 66,051.30 5.83

2006-07 8119.97 81,211.33 10.00

2007-08 11334.95 1,11,692.72 9.85

2008-09 18847.75 1,33,443.00 7.08

2009-10 19010.37 1,41,847.47 7.46

Working Capital Turnover Ratio:

Formula = Net Sales(COGS)/Net Working Capital

Where Net Working Capital = Current Assets – Current Liabilities

Working capital turnover ratio establishes a relationship between net

sales and working capital. This ratio measures the efficiency of
utilisation of working capital
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Objective and Significance: This ratio indicates the number of times the
utilisation of working capital in the process of doing business. The
higher is the ratio, the lower is the investment in working capital and
the greater are the profits. However, a very high turnover indicates a
sign of over-trading and puts the firm in financial difficulties. A low
working capital turnover ratio indicates that the working capital has
not been used efficiently. The ratio for Reliance has been varying
between 5 and 10 and it is currently 7.

It is quite satisfactory for Reliance Industries.

2) Cash position

(In Rupees Crores)

YEAR Cash

2005-06 3610.72

2006-07 2616.41

2007-08 1937.04

2008-09 4474.16

2009-10 22742.10

The cash position of the firm can be found out from the amount of
cash and cash equivalents the firm has at the end of the period.

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As the above table shows, the cash and bank balance have been
varying a lot. It was as low as 1937 Rupees crores and it was as high
as 22742 Rupees crores.

Also, in the year 2009-10, the company had an idle cash of 22742
Rupees crores which is too high compared to the earlier years. It is
advised that the company invests this idle cash in some marketable
securities to earn some money.

Also, the cash position of Reliance Industries is very erratic as there

are huge variations in the cash balances of various years.

3) Short-term financing

(in Rupees Crores)

YEAR Short Term Finance

2005-06 2542.56

2006-07 5039.35

2007-08 4240.46

2008-09 6531.70

2009-10 8367.46

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Short Term Financing refers to the financing that the company has got
and it will utilize it in next one year. It is a crucial part of the financing
requirements of the company so any company cannot afford to ignore
it.

In the case of Reliance Industries Limited, the short term financing has
increased over the period of 5 years . It was 2542 rupees crores in the
year 2004-05 which was the minimum and it was 8367 rupees crores
in the year 2008-09 which was the maximum.

So, the Short Term Financing as per the above table is increasing over
the years.

Now, the implication of Short Term Financing is that the company is

able to manage its short term finance very efficiently as per its
requirements.

Thus, the Short Term Financing position of Reliance Industries is very

satisfactory seeing its current trend.

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4) Credit policy
(In Rupees Crores)

Credit Policy of Reliance Industries Limited

Collection
Opening Closing
YEAR Sales DTR Period
Debtors Debtors
(Days)

2005-
3046.38 3927.81 66,051.30 18.94 19.27
06

2006-
3927.81 4163.62 81,211.33 20.07 18.18
07

2007-
4163.62 3732.42 28.29 12.90
08 111,692.72

2008-
3732.42 6227.58 133,443.00 26.80 13.62
09

2009-
6227.58 4571.38 141,847.47 26.27 13.89
10

Here to find the credit policy of the firm, we have divided the sales
with debtors. The final result shows us that the credit policy, which is
understood as the amount of credit the company is allowing and the
amount of sales. Thus, we can calculate Debtors Turnover Ratio to find
the credit policy of Reliance Industries Ltd.

This gives the idea about the policy of the firm and It affects the
liquidity position of the company. The value of was 18 times in the
beginning and now the company has increased this ratio to 26 which is
excellent.
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The Collection Period represents the number of days required to realize

cash from receivables. It is a better representation of DTR. This value
was 19 days in the beginning and now the company has decreased it
to 13 days which is excellent. It means company is realizing its debts
earlier than before now.

Thus, we can say that the credit policy of Reliance Industries is very
tight as the Debtors Turnover Ratio (DTR) is very high and it has
reduced its collection period .

Thus , the credit policy of Reliance Industries is satisfactory and it has

improved it.

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5)Inventory management policy

(In Rupees Crores)

Inventory Turnover of Reliance Industries Limited

Inventory
Opening Closing Period
YEAR Stock Stock Net Sales ITR (Days)

2005-
40.46
06 7231.22 7412.88 66,051.30 9.02

2006-
39.40
07 7412.88 10119.82 81,211.33 9.26

2007-
36.37
08 10119.82 12136.51 111,692.72 10.04

2008-
36.08
09 12136.51 14247.54 133,443.00 10.12

2009-
37.42
10 14247.54 14,836.72 141,847.47 9.75

To get the idea about the company policy for the inventories, we have
found out the ratio of sales and the inventory, also known as the
Inventory Turnover Ratio. This has been calculated by Dividing Net
Sales by Average Stock Inventory. A low turnover implies poor sales
and, therefore, excess inventory. A high ratio implies either strong
sales or ineffective buying. Here, the value of this ratio has been
around 7-9. It is satisfactory. Thus, it can be safely said that the firm
is doing very well.
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Inventory Period is a representation of the inventories turnover ratio in

the number of days. Inventory turnover ratio with debtors turnover
represents the total accounting cycle. It has always been above 36
days with minimum in the year 2008-09 and highest of 40 days in the
year 2005-06. So, the Reliance Industries has the average of
Inventory Period of around 37 days which is adequate and the speed
at which the company turns over its inventory is also satisfactory.

Thus, by seeing the Inventory Turnover Ratio (ITR) and the Inventory
Period in Days , we can say that Inventory Management Policy of
Reliance Industries is highly satisfactory.

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REFERENCES:

1. www.ril.com

2. www.bseindia.com

3. http://www.ril.com

4. http://en.wikipedia.org

5. http://www.indiainbusiness.nic.in (MINISTRY OF EXTERNAL AFFAIRS,

GOVERNMENT OF INDIA)

6. http://business.mapsofindia.com

7. http://www.wisegeek.com

8. www.moneycontrol.com

9. RBI Report

10. DEUTSCHE BANK Report on Reliance Industries

11. www.myiris.com

12. www.in.reuters.com

13. www.economictimes.com

14. Rediff Money

15. Google Finance

16. Yahoo Finance

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