Reliance

Friends,

I appreciate Ambanis for what they delivered in spite of Indiras, Rajivs and V.P.Singhs and helped by Narsimharaos, Atals and Manmohans. Now they have shown exemplary performance in times of Modi. Now there is someone manipulating upwards the share price of Reliance because I don’t find it proper for it to go up in such fashion. The following is my point by point logic for saying so:

  1. This went down to close under 1000/- only in March ’20. This displayed that it is a vulnerable stock like most others.
  2. It is in petroleum refining while fossile fuels are being edged out in favour of other natural sources.
  3. It has expanded its capital base through right issue.
  4. It is now debt free by its own admission but if it is so deleveraged than it is that much difficult for it to add to bottom line, the tax it self will be a big burden.
  5. It’s book value is 703/- , return on assets 3.68%, return of equity is 9.47% and return of capital employed is 10.32%. These are not such figures that may deliver the kind of expectations created right now. I wonder why would a company pay off debt if it is earning more on capital employed than prevailing interest rate but it has done the very same thing.
  6. This company has raised a lot of investment in form equity capital and it doesn’t come for free, it has to be serviced by post tax earnings at satisfactory level.
  7. It is talked that it’s telecom and retail business lines will be delivering bonanzas but here I may say that there are many ifs and buts because it will cater to a population which is still poor, very poor in comparison to west and China. India is growing and it’s a positive but India can’t grow at breakneck speed and create room for activities of Reliance to expand at breakneck speed.
  8. The company has 7 times reserves of its capital base i e Rs 418,245 crs which is after its more than 40 years of history, a good part of it is raised directly from shareholders and public. It’s market capitalization now is precisely Rs 14,700,141/- (CMP 2319/-) . To service it a pretax profit of at least Rs 196,000 is needed to ensure nominal return equal to 10% which is minimum expectation from a risky investment. It recorded sales of Rs 659,205 and made net profit of Rs 44324/- on consolidated basis. Now to presume that it will grow revenue by four times even in next full 5decade is too far fetched. Hence, there will be some correction now or later to bring it to a reasonable level in terms of price.
  9. Now some might say that there is expectation of good growth and let us presume that growth in business happens too, say at the rate of 10%, but then there will be cost of carrying stock and it will also add 10% to its holding cost every year. So equation will remain the same and at some point catching up with reality will be needed.
  10. There is one thing to note however and it is that the foreign investors expect return of just 5% on their investment and we Indians expect it to be at least 10% . So while it’s okay for FIIs and other foreign based company to have a part of it but it’s a big ‘No’ for us Indians.
  11. There is no possibility of buying favours from present govt to have edge over competition like was the case sometimes in the past, all know it and need not be elaborated.
  12. I am seeing what’s going on as some thing that had happened when bearish Marwari group of Bombay Stock Exchange was taught a lesson by senior Ambani and afterwards its share price only crashed. I want none of the individual investor to be caught in middle of such fights and therefore I humbly suggest small investors to cash out if they hold this scrip.
  13. I however wish a remarkable future of Reliance, my sole purpose is to point out that it’s price has gone beyond reasonable level and far more than Buffet and Manger would want to even have a look at it.
  14. I think it will not be out place to mention that Reliance used to trade a little under 4 times of its book value, rather was made to trade at that level, in years when it was busy with raising money from investors routinely in late 70s and early 80s, it is trading similarly while it’s busy raising capital now also.
  15. There is another thing to ponder about. Reliance growth is pegged at two lines of businesses under its fold through subsidiaries, Reliance Jio and Reliance Retail. But the stake of parent company is continuously being diluted by sharing them away with other investors. This is letting Reliance have liquid cash with which it is settling debt obligation. Isn’t it like reducing scope of Reliance shareholders benefitting out of two business lines mentioned earlier.
  16. The gold prices are lower by 4000/- per 10gm and this indicates that money supply is shrinking. Equity universe in general is showing signs of weakness too, may be on account of this factor.
  17. Thanking you and inviting everyone to give their own opinion in comments box.
  18. HariOm,
  19. Krishna Khandelwal

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