As discussed in the previous post, Reliance Industries or RIL, has fallen out of favor with investors. In this post, we look at the fundamental picture of RIL and try to ascertain if there are any gaps in the fundamental view of RIL.
Attached is the company performance on a yearly basis and on a quarterly basis:
As we see in the snapshot above, nothing really has changed on the ground for RIL. Its performance from 2007 to 2011 has been stellar, with revenues growing each year and profits following suit. in a period of 4 years, the revenues have doubled, which is terrific for a company of this size, this delivering a annual CAGR of over 22%.
The profits have followed suit. Net profits during this period have almost doubled from 10,908 cr to 20,286 cr, thus delivering a CAGR of over 16%. One word of caution is that firm has been adding to its net shares outstanding over this period, thus increase in profits does not result in increase in Earnings per share (EPS).
Even on a Quarterly basis, over the past 4 quarters, RIL performance has been stellar. Revenues have shown growth on a quarterly basis, growing from 59,789 cr in quarter ending Dec,10 to 85,135 cr in quarter ending Dec,11. Profits and EPS have been declining over the Dec,11 quarter, which shows a drop of net profit to 4,440 cr over 5,703 cr recorded in Sep, 11 quarter. Net profit margin has declined to 5.11% from 7.16% over one quarter. Thus what we see is that this behemoth is able to clock solid growth in revenues, but on the profit margins front there is a visible decline. Markets sometime take a myopic view of quarterly EPS and net margins and downgrade a firm, even though it may be growing steadily on revenues front. This creates a opportunity for traders and value investors to make a investment in the scrip, wherever market is being too negative about it, and allow the opinions to change over a period of time, thus bringing in better valuations and subsequent capital gains.
I quickly want to touch upon some value parameters for the firm, so as to bring a additional perspective other than revenues and profits. One key parameter which value investors look for is the Book Value. This represents the amount a firm brings to the table in terms of its tangibles, i.e. simply speaking, if you sell the firm piece by piece, what is the amount that can be realized. For RIL, the Book Value is at INR 446. Thus if you own one share of RIL, you actually own 446 rupees of value that you can realize when the firm closes down its operations, simply speaking. Making investments closer to Book Value is a smart thing to do, as you avoid overpaying for a security.
For Large Caps like RIL, amount closer to 2X the Book Value is not a steep price to pay either. There are times when market goes over board and investors end up investing in firms trading at 4-5 times their Book Value. That's the time one should step back and make slow careful exits from the heated markets. Not at 2X the Book Value. This is the time time step in and make investments.
One more simple thing to look at, and most investors miss looking at this parameter is Dividends. Firms which pay dividend on a regular basis are good companies. Period.
For RIL, the firm has never missed a dividend payment in last decade. One also needs to confirm the amount of dividend paid over the price you are paying to hold the share. That's the only payout you receive, if you are a long term investor and hold the scrip for over a year. e.g. for RIL, a share holder will receive 80% of dividend and this is calculated on face value of a share. So a shareholder receives INR 8 of dividend for holding a share for one year. On a market price of about Rs 800, this stands to about 1% rate of return for a long term investors from dividends alone.
We can go on and on analyzing various aspects of RIL fundamentally, but i will slowly introduce other parameters, taking other examples.
At this point, all we want to say is that RIL, fundamentally and technically, looks like a safe, solid long term investment for a Indian investor.
Happy investing!
Attached is the company performance on a yearly basis and on a quarterly basis:
The profits have followed suit. Net profits during this period have almost doubled from 10,908 cr to 20,286 cr, thus delivering a CAGR of over 16%. One word of caution is that firm has been adding to its net shares outstanding over this period, thus increase in profits does not result in increase in Earnings per share (EPS).
Even on a Quarterly basis, over the past 4 quarters, RIL performance has been stellar. Revenues have shown growth on a quarterly basis, growing from 59,789 cr in quarter ending Dec,10 to 85,135 cr in quarter ending Dec,11. Profits and EPS have been declining over the Dec,11 quarter, which shows a drop of net profit to 4,440 cr over 5,703 cr recorded in Sep, 11 quarter. Net profit margin has declined to 5.11% from 7.16% over one quarter. Thus what we see is that this behemoth is able to clock solid growth in revenues, but on the profit margins front there is a visible decline. Markets sometime take a myopic view of quarterly EPS and net margins and downgrade a firm, even though it may be growing steadily on revenues front. This creates a opportunity for traders and value investors to make a investment in the scrip, wherever market is being too negative about it, and allow the opinions to change over a period of time, thus bringing in better valuations and subsequent capital gains.
I quickly want to touch upon some value parameters for the firm, so as to bring a additional perspective other than revenues and profits. One key parameter which value investors look for is the Book Value. This represents the amount a firm brings to the table in terms of its tangibles, i.e. simply speaking, if you sell the firm piece by piece, what is the amount that can be realized. For RIL, the Book Value is at INR 446. Thus if you own one share of RIL, you actually own 446 rupees of value that you can realize when the firm closes down its operations, simply speaking. Making investments closer to Book Value is a smart thing to do, as you avoid overpaying for a security.
For Large Caps like RIL, amount closer to 2X the Book Value is not a steep price to pay either. There are times when market goes over board and investors end up investing in firms trading at 4-5 times their Book Value. That's the time one should step back and make slow careful exits from the heated markets. Not at 2X the Book Value. This is the time time step in and make investments.
One more simple thing to look at, and most investors miss looking at this parameter is Dividends. Firms which pay dividend on a regular basis are good companies. Period.
For RIL, the firm has never missed a dividend payment in last decade. One also needs to confirm the amount of dividend paid over the price you are paying to hold the share. That's the only payout you receive, if you are a long term investor and hold the scrip for over a year. e.g. for RIL, a share holder will receive 80% of dividend and this is calculated on face value of a share. So a shareholder receives INR 8 of dividend for holding a share for one year. On a market price of about Rs 800, this stands to about 1% rate of return for a long term investors from dividends alone.
We can go on and on analyzing various aspects of RIL fundamentally, but i will slowly introduce other parameters, taking other examples.
At this point, all we want to say is that RIL, fundamentally and technically, looks like a safe, solid long term investment for a Indian investor.
Happy investing!
Very good analysis. Easy to understand. Thank you for the good work
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