Post Graduate Programme in Management

In partial fulfillment of the

Financial Reporting Analysis and Valuation Course

Financial statement analysis and Valuation
on
Reliance Industries Limited

Submitted to

Prof. V. K. GUPTA

Submitted by

Group 23
Group members
Aravinth Raj G
Mathan Kumaran V
Sivabalan D

Submitted on

August 29, 2015

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Financial Reporting Analysis & Valuation
Group 23

Table of Contents:

S. No

Topic

Pg. No

Introduction

Business Strategy analysis

Industry Description

Sustainable growth analysis

Economic Value added Analysis

Quality Earnings calculation

Projected financial statements & Free cash flow

Valuation using FCF method & RE method

Sensitivity Analysis

10

Conclusion

13

INTRODUCTION:
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Reliance Industries Limited (RIL), the second-largest publicly traded company in India by
market capitalization, is a conglomerate holding company headquartered in Mumbai,
Maharashtra, India. Reliance owns businesses in energy, petrochemicals, natural resources,
textiles, retail and telecommunications. Reliance is the most profitable company in India, and
the second largest company in India as measured by revenue after the governmentcontrolled Indian Oil Corporation. Ranked 114th on the Fortune Global 500 list of the
world's biggest corporations, RIL contributes approximately 20% of total Indian exports.
RIL`s equity shares are listed on both of the Indian Markets- National Stock Exchange of
India Limited (NSE) and the Bombay Stock Exchange Limited (BSE).The number of
shareholders in RIL are approximately 3 million. The promoter, Ambani family, holds
approximately 45.34% of the total shares. A government company LIC India is the largest
non-promoter investor in the company with 7.98% shareholding. However, the remaining
54.66% shares are held by public shareholders, FII and corporate bodies. Based on its
performance, The Company was selected as one of the world's 100 best managed companies
for the year 2000 by the reputed Industry Week magazine.
BUSINESS STRATEGY ANALYSIS:
RIL`s main strategy is to grow, by leveraging its existing asset base and seek investing in
opportunities that is strategic to its existing business. The company initially focused on
activities and investments in India to take advantage of the huge domestic market. After
attaining the leader position here, they have rolled out their operation on a global scale.
All over the years, it is obvious that it will not invest unless the investment creates value for
its shareholders. No further steps would be taken unless this basic criteria is met.
Reliance Industries Limited initiated a structured dialogue with their key stakeholders in 2006
and further it strengthened this engagement
In the year 2007 and hence understanding their concerns and expectations to find common
solutions. Based on this they have assigned the following strategies for themselves, i.e.,
Providing opportunity to their stakeholders to raise their concerns, broadening the risk
universe; manage risks and reputation thorough participative engagement, re-engineering the
processes and establishing partnerships/collaborations to find common solutions, exploring
new strategic opportunities in the market and building trust between RIL and its stakeholders.
The strategic milestones the company has enjoyed over a period of time are significant
investments in E&P of O&G to secure energy supplies, implementing systems to monitor and
measure sustainability performance, Introducing sustainability awareness programmes in the
formed Reliance Innovation Council.
Some of the unique strategies that they follow in energy sector differentiates them from the
rest are as follows: Reduction of cost of power generation, Ensuring fuel supply, Focusing on
power deficit regions and establishing an Optimal mix of off-take arrangements.

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INDUSTRY DESCRIPTION:
The global economy in FY 2014-15 saw a steep decline in oil prices, which had significant
impact on energy businesses. This coupled with slowing growth in some of the leading global
economies impacted currencies. But, there was positive news in terms of faster-thananticipated economic growth recovery in the United States, which provided momentum for
the global economic recovery.
RIL is among the worlds largest producers of petrochemicals with global scale capacities
across the polymer and polyester chain. Vertical integration from oil & gas to refining and
downstream petrochemical products is among RILs key competitive advantage. This
provides RIL feedstock security, scalability and economies of scale. RIL is the pre-eminent
petrochemical company in India with a product portfolio spanning across polymers,
polyester, fibre intermediates, elastomers and chemicals
RIL constantly focuses on technology, cost improvements and safe practices, while
continuing to invest in new growth opportunities
SUSTAINABLE GROWTH ANALYSIS:
The RILs performance can be understood based on the growth in different aspects. The
determined growth factors can be used for the following:
1.
2.
3.
4.

Business analysis
Financial analysis
Accounting analysis
Valuation analysis

To ensure a robust sustainability practice that will help advance business priorities, drive
innovation, and achieve a competitive advantage, RILs 4P approach, along with key
focus areas, delineate actionable points in order to percolate sustainability within every
facet of the organisation.

Revenue
Gross profit
margin
PAT
PM
Total Asset
PAT + Interest
(1-t)
ROA
Total Equity
ROE
Earnings per
share

Mar '15
3,29,076.0
0

Mar '14
3,90,117.0
0

Mar '13
3,60,297.0
0

Mar '12
3,29,904.0
0

Mar '11
2,48,170.0
0

9.60%
22,719.00
6.90%
3,05,317.0
0

7.91%
21,984.00
5.64%
2,82,572.0
0

8.54%
21,003.00
5.83%
2,33,488.0
0

10.19%
20,040.00
6.07%
2,21,596.0
0

15.36%
20,286.00
8.17%
2,09,510.0
0

24,543.89
8.039%
2,16,176.0
0
10.51%

24,455.74
8.655%
1,97,091.0
0
11.15%

23,343.67
9.998%
1,78,965.0
0
11.74%

22,096.18
9.971%
1,62,969.0
0
12.30%

22,080.82
10.539%
1,46,082.0
0
13.89%

70.21

68.02

65.05

61.26

61.97

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Capital
employed
ROIC

1,92,744.0
0
16.40%

1,96,510.0
0
15.71%

1,80,979.0
0
17.01%

1,67,588.0
0
20.06%

1,71,858.0
0
22.18%

16.00%
14.00%
12.00%
10.00%
8.00%

PM

ROA

ROE

6.00%
4.00%
2.00%
0.00%
Mar '15

Mar '14

Mar '13

Mar '12

Mar '11

From the above graph, it is observed that the firm growth is gradual marginal decrease from
March 2011 to March 2015 in profit margin, ROA and ROE. But growth rate is almost
remains constant in that range.

Year on Year Growth difference

Mar
'15
15.65
%

Mar
'14

Mar
'13

8.28%

Gross profit margin

PAT

21.3%
3.3%

-7.4%
4.7%

9.21%
16.1%
4.8%

PM
Total Asset
PAT + Interest (1-t)

22.5%
8.0%
0.4%

ROA
Total Equity
ROE
Earnings per share
Capital employed

-7.1%
9.7%
-5.8%
3.2%
-1.9%

-3.3%
21.0%
4.8%
13.4%
10.1%
-5.0%
4.6%
8.6%

ROIC

4.3%
12.96
%
87.04

-7.6%
12.70
%
87.30

Revenue

Divident payout
Retention rate

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Financial Reporting Analysis & Valuation
Group 23

-4.0%
5.4%
5.6%

Mar
'12
32.93
%
33.7%
-1.2%
25.7%
5.8%
0.1%

0.3% -5.4%
9.8% 11.6%
-4.6% -11.4%
6.2% -1.1%
8.0% -2.5%
15.2% -9.6%
12.51
12.63
%
%
87.49
87.37

Growth = ROE * Retention

rate

9.15%

9.74%

%
10.27
%

%
10.74
%

ECONOMIC VALUE ADDED:

It aims to measure the firms ability to generate profits in excess of the cost of the capital
employed
Method of calculating EVA:
1. EVA = NOPAT (Cost of capital * total investment)
2. EVA = RONA Cost of capital * capital
3. EVA = (NOPAT/Capital Cost of capital) * capital
Cost of Equity:
10-Year Treasury Constant Maturity
Rate, Rf
Beta
Market Premium
Re
Cost of Debt:

2.28%
1.06 (from Reuters)
7.00%
9.70%
Mar '15

Avg debt
Interest expense
Rd
Avg Rd
WACC
Total Capital
Cost of Capital employed
NOPAT = EBIT (1-t)
EVA = NOPAT - Cost of capital
employed

Mar '14

Mar '13 Mar '12

51,889.5 52,501.0
0
0
3,036.00 2,667.00
0.058509 0.050799
5.47%
5.08%

80,921.00 63,419.00
2,367.00
3,206.00
2.93%
5.06%
3.99%
5.45%
7.766%
3,05,317.00
23711.3254
24364.2540
4
652.928642
1 (sensitive wrt Market premium)

QUALITY EARNING
The profits reported in financial statement are manipulated profit or dirty profit. For
evaluating the company, the comparison should be done on the same platform. That profit is
known as clean profit or quality profit.
Reasons for low quality earnings in financial statement:
1. Earnings based on liberal accounting principles, such as FIFO and straight-line
depreciation.
2. Earnings that are volatile over time.
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3. Earnings that are unlikely to be realized in a distributable cash form.

4. Earnings that do not reflect economic reality and are overly optimistic of the future.
5. Earnings that are the result of excessive or questionable financial deals.
Reasons for high quality earnings in financial statement:
1. Earnings determined by conservative accounting principles, such as LIFO and
accelerated depreciation.
2. Earnings that do not fluctuate far from their trend line.
3. Earnings that are potentially distribute in cash.
4. Earnings that reflect a prudent, realistic view of the companys current and anticipated
circumstances.
5. Earnings that come from operations and not from financial manoeuvres that may
jeopardise stockholder equity in the firm.
Variation in depreciation calculation:
We have compared RIL with its comparable company IOC for estimating its asset life time to
determine the quality earnings and the results are tabulated.
For RIL
Gross FA
Acc dep
Current yr dep
Approximate Useful
life
App. Age of asset

Mar '15

Mar '14

Mar '13

Mar '12

2,05,638.00
91,075.00
8,488.00

1,94,542.00
85,136.00
8,789.00

1,87,607.00
77,859.00
9,465.00

1,82,946.00
69,223.00
11,394.00

Mar '11
2,03,686.0
0
60,979.00
13,608.00

24.23
10.73

22.13
9.69

19.82
8.23

16.06
6.08

14.97
4.48

For IOC
Gross FA
Acc dep
Current yr dep
Approximate
Useful life
App. Age of asset

Mar '14
1,11,730.13
48,781.34
5,760.09

Mar '13
1,04,104.83
43,472.10
5,200.99

Mar '12
99,455.46
39,336.13
4,867.79

Mar '11
92,696.69
34,509.29
4,546.67

19.40
8.47

20.02
8.36

20.43
8.08

20.39
7.59

RIL has expected to have more life for its asset. Hence to find clean profit, considered the
common platform
In 2014, the Rs. 1,240 cr has to be reduced from its original profit due to the over estimation
of its asset life time.
Expected to be paid (Rs. in crs)
Actually paid (Rs. in crs)
Profit has to be reduced (Rs. in
crs)

10029.3397
8,789.00
-1,240.34

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Unrealised gain:
Other Income
Interest
From Current Investments
From Long Term Investments

14-15
13-14
301
442
1054
1025
4059
5005
5414
6472

Dividend
From Current Investments
From Long Term Investments

243
7
250

88
3
91

Other non-operating income

1011
2035
3046
11

1716
632
2348
25

Other income

8721

8936

Gain from sale of investment

(Rs. in Crs)

Unexpecte
-698 d gain

Net gain on sale of

investment
From Current Investments
From Long Term Investments

Payables and Receivables:

RIL

RIL

IOC

IOC

Trade payables
payables % of sales

2015
54470
442.88%

2014
57862
569.90%

2014
35,697.00
7.54%

2013
29,667.00
6.64%

Trade receivables
Receivables of sales

4661
37.90%

10664
105.03%

11,023.00
2.33%

11,257.00
2.52%

As compared with IOC, RIL is managing its cash conversion cycle in a better way. (i.e) its
account payables are more and its accounts receivables are less with respective to its
comparative company.
Quality earning summary (Rs. in
Crs)
Before tax
Adj. Depreciation
(less)
Adj. Other income

-1240
-698

After
tax
-956
-538

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Financial Reporting Analysis & Valuation
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less)
Net (less)
Dirty earnings
Clean earning (4-3)

-1938
29468
27530

-1494
22719
21225

RIL has expected to have more life of 25 yrs with respect to IOC of 19 years for calculating
its dep. Hence to find clean profit, considered the common platform (compared with IOC)
FORECASTING AND VALUATION:
The forecasted figure based on the assumed growth rate of 8.69% is as follows:
Net sales
Total income
Total
Expenditure
Operating
Profit
Profit Before
Tax
PAT

Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
3,70,431 4,02,621 4,37,609
4,75,637 5,16,970
3,79,368 4,12,335 4,48,167
4,87,112 5,29,442
3,33,521 3,62,503

3,94,005

4,28,244

4,65,458

38,241

41,564

45,176

49,101

53,368

30,640
24,165

33,302
26,265

36,196
28,547

39,342
31,028

42,761
33,724

The forecasting is done by calculation the sales ratio method. The average growth
from 2011-2015 was taken as the growth of the sales for the 5 year forecast period.

Valuation:
The valuation is done based on the FCF method.
In this method the free cash flow for 2016-2020 was calculated and the terminal value is
calculated.
Free Cash
Flow

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

17,228

-5,890

30,769

6,824

49,302

11,871

14,434

17,218

20,245

23,535

WACC of RIL is7.76613%, and the g=1.5% is taken.

Item
Value
Growth
WACC
No of outstanding (in
Crs)
Share price (in Rs.)

Values
449627.01
0.0150
0.0777
323.59
2120.88

Total value of the firm is found to be Rs.449627 Crs.

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Financial Reporting Analysis & Valuation
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SENSITIVITY ANALYSIS:
Sensitivity analysis is done by varying WACC and growth each at a time to determine the
value of the firm and its share price.

a) Changing Growth rate by keeping cost of capital constant:

Growth
WACC
No of outstanding
share
Value
Share price

1.50%
0.078
323.586
449627
2120.88
2

1.75%
0.078
323.58
6
466446

2%
0.078
323.58
6
473572

2.00%
0.078
323.58
6
484724

0.50%
0.777
323.58
6
393922

0.00%
0.777
323.58
6
371449

-1%
0.777
323.58
6
334194

2200.6

2233.3

2286.4

1858

1752

1576

b) Changing cost of capital constant by keeping Growth rate constant:

WACC
Growth
No of outstanding
share
Value
Share price

0.077661
1.50%

0.08
1.50%

0.09
1.50%

0.1
1.50%

0.06
1.50%

323.5864
449627
2120.882

323.5864
435439
2053.9

323.5864
384479
1813

323.5864
345132
1627

323.5864
602967
2844

The sensitivity Analysis was done by varying the Growth rate of the FCF and the WACC of
the company.

As the Growth Rate increases the Value of the Firm increases

As the WACC increases the value of the firm increases

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Annexure 1: BALANCE SHEET

Sources Of Funds
Total Share Capital
Equity Share Capital
Share Application
Money
Preference Share
Capital
Reserves
Net worth
Secured Loans
Unsecured Loans
Total Debt
Total Liabilities

Mar '15

Mar '14

Mar '13

Mar '12

Mar '11

3,236.00
3,236.00

3,232.00
3,232.00

3,229.00
3,229.00

3,271.00
3,271.00

3,273.00
3,273.00

17

17

25

0
2,12,923.
00
2,16,176.
00

0
1,75,711.
00
1,78,965.
00

0
1,59,698.
00
1,62,969.
00

2,036.00
87,105.0
0
89,141.0
0
3,05,317.
00

0
1,93,842.
00
1,97,091.
00
10,744.0
0
74,737.0
0
85,481.0
0
2,82,572.
00

2,422.00
52,101.0
0
54,523.0
0
2,33,488.
00

6,949.00
51,678.0
0
58,627.0
0
2,21,596.
00

0
1,42,800.
00
1,46,082.
00
10,104.0
0
53,324.0
0
63,428.0
0
2,09,510.
00

2,05,638.
00

1,94,542.
00

1,87,607.
00

1,82,946.
00

2,03,686.
00

0
91,075.0
0
1,14,563.
00
75,753.0
0
1,12,573.
00
36,551.0
0

0
85,136.0
0
1,09,406.
00
41,716.0
0
86,062.0
0
42,932.0
0
10,664.0
0
36,624.0
0
90,220.0
0
40,179.0
0
0
1,30,399.
00

1,055.00
77,859.0
0
1,08,693.
00
19,116.0
0
52,509.0
0
42,729.0
0
11,880.0
0
49,547.0
0
1,04,156.
00
32,982.0
0
0
1,37,138.
00

3,127.00
69,223.0
0
1,10,596.
00

5,467.00
60,979.0
0
1,37,240.
00
12,228.0
0
37,652.0
0
29,825.0
0
17,442.0
0
27,135.0
0
74,402.0
0
17,730.0
0
0
92,132.0
0

Application Of Funds
Gross Block
Less: Revaluation
Reserves
Less: Accum.
Depreciation
Net Block
Capital Work in
Progress
Investments
Inventories
Sundry Debtors
Cash and Bank
Balance
Total Current Assets
Loans and Advances
Fixed Deposits
Total CA, Loans &
Advances

4,661.00
11,571.0
0
52,783.0
0
42,113.0
0
0
94,896.0
0

11 | P a g e
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Group 23

7,754.00
54,008.0
0
35,955.0
0
18,424.0
0
39,598.0
0
93,977.0
0
25,678.0
0
0
1,19,655.
00

Deferred Credit

0
86,210.0
0
6,258.00
92,468.0
0
2,428.00

0
80,844.0
0
4,167.00
85,011.0
0
45,388.0
0

0
79,620.0
0
4,348.00
83,968.0
0
53,170.0
0

0
66,159.0
0
4,258.00
70,417.0
0
49,238.0
0

0
65,141.0
0
4,601.00
69,742.0
0
22,390.0
0

Total Assets

0
3,05,317.
00

0
2,82,572.
00

0
2,33,488.
00

0
2,21,596.
00

0
2,09,510.
00

Contingent Liabilities
Book Value (Rs)

80,641.0
0
668.05

75,955.0
0
609.78

54,600.0
0
554.22

54,075.0
0
498.21

56,305.0
0
446.25

Current Liabilities
Provisions
Total CL &
Provisions
Net Current Assets
Miscellaneous
Expenses

Annexure 2: PROFIT AND LOSS STATEMENT

Mar '15

Mar '14

Mar '13

Mar '12

Mar '11

3,40,814.
00
11,738.0
0
3,29,076.
00
8,721.00
-1,943.00
3,35,854.
00

4,01,302.
00
11,185.0
0
3,90,117.
00
8,936.00
-412
3,98,641.
00

3,71,119.
00
10,822.0
0
3,60,297.
00
7,998.00
3,317.00
3,71,612.
00

3,39,792.
00
9,888.00
3,29,904.
00
6,192.00
872
3,36,968.
00

2,58,651.
00
10,481.0
0
2,48,170.
00
3,052.00
3,243.00
2,54,465.
00

2,67,834.
00
12,299.0
0
3,686.00

3,34,283.
00
10,153.0
0
3,370.00

3,10,428.
00

2,79,737.
00

1,98,076.
00

7,166.00
3,354.00

4,094.00
2,862.00

2,255.00
2,624.00

2,692.00
0

1,985.00
0

2,258.00
0

2,731.00
0

2,612.00
0

Income
Sales Turnover
Excise Duty
Net Sales
Other Income
Stock Adjustments
Total Income
Expenditure
Raw Materials
Power & Fuel Cost
Employee Cost
Other Manufacturing
Expenses
Selling and Admin

12 | P a g e
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Group 23

Expenses
Miscellaneous
Expenses
Preoperative Exp
Capitalised
Total Expenses
Operating Profit
PBDIT
Interest
PBDT
Depreciation
Other Written Off
Profit Before Tax
Extra-ordinary items
PBT (Post Extra-ord
Items)
Tax
Reported Net Profit
Total Value Addition
Preference Dividend
Equity Dividend
Corporate Dividend
Tax
Per share data
(annualised)
Shares in issue
(lakhs)
Earning Per Share
(Rs)
Equity Dividend (%)
Book Value (Rs)

9,020.00

9,037.00

9,621.00

7,733.00

7,720.00

0
2,95,531.
00
31,602.0
0
40,323.0
0
2,367.00
37,956.0
0

0
3,58,828.
00
30,877.0
0
39,813.0
0
3,206.00
36,607.0
0

0
3,32,827.
00
30,787.0
0
38,785.0
0
3,036.00
35,749.0
0

8,488.00
0
29,468.0
0
0
29,468.0
0
6,749.00
22,719.0
0
27,697.0
0
0
2,944.00

8,789.00
0
27,818.0
0
0
27,818.0
0
5,834.00
21,984.0
0
24,545.0
0
0
2,793.00

9,465.00
0
26,284.0
0
0
26,284.0
0
5,281.00
21,003.0
0
22,399.0
0
0
2,628.00

0
2,97,157.
00
33,619.0
0
39,811.0
0
2,667.00
37,144.0
0
11,394.0
0
0
25,750.0
0
0
25,750.0
0
5,710.00
20,040.0
0
17,420.0
0
0
2,531.00

0
2,13,287.
00
38,126.0
0
41,178.0
0
2,328.00
38,850.0
0
13,608.0
0
0
25,242.0
0
0
25,242.0
0
4,956.00
20,286.0
0
15,211.0
0
0
2,385.00

615

475

447

410

387

32,356.8
9
70.21379
4
100
668.05

32,319.0
2

32,286.6
3

32,710.5
9

32,733.7
4

68.02
95
609.78

65.05
90
554.22

61.26
85
498.21

61.97
80
446.25

CONCLUSION:
RIL`s main strategy is to grow, by leveraging its existing asset base and seek investing in
opportunities that is strategic to its existing business. The company initially focused on
activities and investments in India to take advantage of the huge domestic market. After
attaining the leader position here, they have rolled out their operation on a global scale. All
over the years, it is obvious that it will not invest unless the investment creates value for its
shareholders.
13 | P a g e
Financial Reporting Analysis & Valuation
Group 23