99.99% of investors believe that Reliance Industry is a DEBT FREE Company. Let us do the fact-checking.

 

18^th June 2021

99.99% of investors believe that Reliance Industry is a DEBT FREE Company. Let us do the fact-checking.

Dear Fellow Travelers,

Namaste! We are dealing with Big Corporates and their DEBT and FED money printing this week. In this series, let us talk about Reliance Industry. Last year company raised investments from foreign investors. Since that day, there is an image that the company has become DEBT Free. In fact, in the lockdown, this was the only company that could raise such a big amount from foreign investors. This will be known as a milestone whenever people will talk about raising capital in tough times. Now, let us check the facts.

Fund Raised: -

As per the Reliance annual report for the year 2020-2021 – it has raised Rs.1,52,056 Crs for Jio Platform / Rs.47,265 Crs for Reliance Retail / Right Issue Rs.53,124 Crs / Reliance BP Fuel Retail Partnership – Rs.7,629 Crs. Totaling about Rs.2.6 lakh Crs. It is natural to assume that they would have paid the debt. In fact, Media guys gave us an impression that Reliance is DEBT FREE at net levels. The meaning of this sentence is that Reliance has money to repay the loan at any time but it has not paid. But readers interpreted that it is ZERO DEBT company.  

Interest Cost: -

The money was raised in the first quarter of the year 2020-21. It means by June 2020; they had the money. If the company has become debt-free; the interest cost should have gone to Zero or significantly low compared to 2019-2020.

As per the balance sheet – Reliance has paid Rs.21,189 Crs as a finance cost in 2020-21. The figures for the last year 2019-2020 were Rs.22,027 Crs. It means there is hardly any change in the interest payments. It means loans would not have been paid back.

The Next Argument: -

Company has invested the capital raised in more profitable avenues compared to the loan interest cost. So, in spite of having money, they preferred to carry on the loans.

This is indeed a very smart step and it must be appreciated. However, if this is done – then the interest to net profit ratio should have changed. It means there must be more net profit compared to the interest payments.

As per the results published – profit before exceptional items and tax was Rs.49,819 Crs as of 31/3/2021 compared Rs. 58,050 Crs as of 31/03/2020. So, profit has gone down last year!! Interest payment was relatively the same at 22,000 Crs as said above.  

The Next Argument: -

Since the company has done strategic investments, they will take time to generate income and contribute to the bottom line. This is also an equally valid point.

So, I will watch for the current years figures and check the interest payments to profit before exceptional items and tax figures.

What is the net effect on Debt?

This is the table given in the Balance Sheet.

 

If you see that Bank Loan – non-current (means long term) is Rs.80270 Crs as on 31/03/2021 compared to Rs.1,10,925 as on 31/3/2020.

If you add all the amounts – non-current + current for the year 2021 – the total is Rs. 1.88 Lakh Crs. compared to Rs. 2.38 lakh Crs in 2020. So, as per the above table Net Loan has come down by Rs.50,000 Crs.

The company had raised Rs. 2.60 lakhs Crs. as per the above information. It means the company has invested Rs.2.10 lakh CRS in some strategic business and we can expect a reward for the same in this year or in the future.

Keep the above basics in mind and keep watching the reliance results going forward.

The Hidden Positive: -

If the company has done all the investments in the capital side – then definitely, they will show good results in the coming time. If the company splits the JIO platforms and gives the shares free of cost – like they did in 2004, then all investors will make good money.

The Hidden Negative: -

Reliance is also a Khichdi like ITC. It has many verticals. The only advantage is that the owner led management is strong in keeping all the verticals in check and they are taking quick actions to improve the performance in all the areas.

If the company decides to split the verticals by way of IPO, then the present reliance shareholders will not get the benefits of the capital investments in JIO platform.

Say major investment is done in the JIO platform and that is the division that is generating super profit among all the divisions. Now, if they split the company – current shareholders will get the shares of all the companies. But if they come out with the IPO, the Reliance industry (current company) will have all the money in terms of the premium they get by selling JIO shares. Present shareholders will be given a quota to apply for the Jio shares. So, rather than getting Jio shares FREE and getting the money multiplied – current shareholders may not get anything.

What Next?

While investing - Do not believe in Media announcements. Take the trouble to check the company balance sheet or official filings to the respective agencies.

My sutra is – Do No Believe, Know.

With the above details, I know what exactly is happening in the Reliance industry. This knowledge gives me an edge while planning my investments.

If you need help in investing, you can approach us.

Follow me on Twitter @hiteshmparikh or on Whatsapp - +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh.