Big Investors added Reliance around 1450/ - with Rights Entitlements!! Are they smart?

2^nd June 2020

Big Investors added Reliance around 1450/ - with Rights Entitlements!! Are they smart?

Dear Fellow Travellers,  

Greetings from Hitesh! If you keep your eyes open – the market is the best teacher. The easiest way to learn is from the smart moves or not so smart moves of the investors. Today I will deal with investments of many foreign investors in Reliance in the month of May.

Starting from Facebook Announcements in Jio Platform in April, we have seen a lot many big investors have invested in Reliance or shown interest to invest in Jio or Oil to Chemical divisions. They have all come one after another. Most guys have paid a premium over Facebook price to buy a stake in reliance. On the 1^st day of the Right issue – one FII bought Rights Entitlements in tons.

Now, the question which I have – Reliance was available at Rs.900-1000 in March and early April. Mutual Fund investors have always been sold one simple story that Fund Manager has a TEAM of Analysts and they are better placed to track the opportunities ahead of the Normal investors.

The above investors are really BIG names in the world markets. They have the best of information / best of contacts and best of resources. What Facebook and others did in April or May – they could have done in March also. They did not have any money issues at that time also. Why they did not invest in March?

Every day there is news of some BIG investors are investing in Reliance while rights issue is going on. The right issue will be over tomorrow. Why there is a continuous news flow of big investors investing during the rights issue and not before?  

Reliance shares were available around Rs.1440 on the 1^st day of the right issue. The person who bought the reliance rights entitlement will have to pay Rs.1250 + Rs.230 for Rights Entitlement. Total payment Rs.1480. Once again why pay the premium of Rs.40 to Rs.50 over the current market price? One may argue that in rights issue the guy is paying just Rs.315 + Rs.230 i.e. Rs.545 only instead of Rs.1440 at one go. For them, Rs.40 to Rs.50 is a 10% premium on Rs.545!! Why pay a 10% premium on rights? (I have rounded the figure of right issue price for simplicity).

There could be two reasons – they know something that which I don’t understand personally from Annual report or they have been simply asked to invest.

Let us look at the performance for the last 5 years. (All figures are in crores except % figures).

Annual	Mar-20	Mar-19	Mar-18	Mar-17	Mar-16	5 Yr
						Growth%
Sales	596,743	567,135	391,677	305,382	273,999	117.79
Other Income	13,956	8,635	9,949	9,443	12,053
Total Income	610,699	575,770	401,626	314,825	286,052	113.49
Total Expenditure	535,173	504,151	344,207	270,834	243,860	119.46
% of Sales	89.68	88.89	87.88	88.69	89.00
EBIT	75,526	71,619	57,419	43,991	42,192	79.01
% of Sales	12.66	12.63	14.66	14.41	15.40
Interest	22,027	16,495	8,052	3,849	3,691	496.78
% of Sales	3.69	2.91	2.06	1.26	1.35
Tax	13,726	15,390	13,346	10,201	8,876	54.64
% of Sales	2.30	2.71	3.41	3.34	3.24
Net Profit	39,773	39,734	36,021	29,941	29,625	34.25
% of Sales	6.67	7.01	9.20	9.80	10.81
Int As % of Sales	55.38	41.51	22.35	12.86	12.46	344.51

With all the funfair of JIO and Retail division – the sales have moved up by just over 118%. Little more than doubled. Net profit has gone up by just 34%. Jio shows EBIT of 21% and Retail shows EBIT of 17% in the annual report. But in the bottom line, the Net profit margin has gone down from 10.81% in 2016 to 6.67% in 2020. So, Net profit Margin on March 20 is just 6.67%. Interest cost has gone up by 500%.

Cash and cash equivalents: - As on March company says it has cash and cash equivalents of approx. Rs.1.75 lakh crores. Debt is approx. Rs.3.40 lakh crores. The company is earning Net Profit at 6.67% and I am sure they must be paying more interest than 6.67%. Looking at the ratings of the company – it can generate money on TAP. Why keep CASH and pay the interest?  

One may say that company would be earning interest on Rs.1.75 lakh Crores. Agreed. But still, their interest cost has gone up each year and they are paying NET INTEREST (interest paid – interest received) which is sizably more than last year. They paid Rs.22000 Crs as interest compared to Rs.16000 Crs. last year. It means the cost of keeping cash and cash equivalent is very high. I am a fan of Mukesh bhai’s efficient working system. But, I am not able to understand this paradox.

What is Munger’s Advice?

Two days back we talked about BETTER METHODS of Thoughts. In the same Munger had said the following.

·       Objectivity and rationality require independence of thought

·       Remember that just because other people agree or disagree with you doesn’t make you right or wrong—the only thing that matters is the correctness of your analysis and judgment

·       Mimicking the herd invites regression to the mean (merely average performance)

I would suggest you all follow Munger’s advice without fail in all your investment venture.

What NEXT?

We have already started our 1^st batch of – Know Yourself Without knowing Astrology class. Just invest 6 hours and know yourself in the most Accurately. For course details – please write to me on WhatsApp.

You can also take personalized guidance for any issues. Write to us.

Have a HAPPY INVESTING.

Follow me on Twitter @hiteshmparikh / WhatsApp – +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh