Friday, October 13, 2017

Red Flags in Reliance Industries Q2 FY 2018 Result

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.

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