Advance corporate finance

Term Assignment
On
“Reliance industry”

POST GRADUATE DIPLOMA IN MANAGEMENT

(Batch 2019-21)

Under the Supervision of

Dr. Rahul k singh

Submitted by
Vaibhav Chaurasia
Roll no. PGMB1950

JAIPURIA INSTITUTE OF MANAGEMENT

A-32 A, Sector 62, Institutional Area, Noida- 201309 (U.P.)

7th march , 2020

Reliance industry overview
Reliance Industries is India's largest private sector company on all major financial
parameters. In 2004, Reliance Industries (RIL) became the first Indian private sector
organisation to be listed in the Fortune Global 500 list. The company operates world-class
manufacturing facilities across the country at Allahabad, Barabanki, Dahej, Hazira,
Hoshiarpur, Jamnagar, Nagothane, Nagpur, Naroda, Patalganga, Silvassa and Vadodara.
Reliance Industries' activities span hydrocarbon exploration and production, petroleum
refining and marketing, petrochemicals, retail and telecommunications. The petrochemicals
segment includes production and marketing operations of petrochemical products. The
refining segment includes production and marketing operations of the petroleum products.
The oil and gas segment includes exploration, development and production of crude oil and
natural gas. The other segment of the company includes textile, retail business and special
economic zone (SEZ) development. Reliance Industries become the first Indian firm to cross
Rs 9 lakh crore market valuation mark. It has become the first ever Indian company to cross
Rs 10 lakh crore market capitalization.

Industry overview
In the petrochemical industry, the organic chemicals produced in the largest volumes are
methanol, ethylene, propylene, butadiene, benzene, toluene, and xylenes. Ethylene,
propylene, and butadiene, along with butylenes, are collectively called olefins, which belong
to a class of unsaturated aliphatic hydrocarbons having the general formula CnH2n. Olefins
contain one or more double bonds, which make them chemically reactive. Benzene,
toluene, and xylenes, commonly referred to as aromatics, are unsaturated cyclic
hydrocarbons containing one or more rings. Olefins, aromatics, and methanol are
precursors to a variety of chemical products and are generally referred to as primary
petrochemicals. Given the number of organic chemicals and the variety and multitude of
ways by which they are converted to consumer and industrial products, this report focuses
primarily on these seven petrochemicals, their feedstock sources, and their end uses.

Competitors
Reliance Industries's top competitors include ONGC, Indorama Ventures, Indian Oil,
Pertamina and Nizhnekamskneftekhim. Reliance Industries is a holding company engaged in
hydrocarbon exploration and production, petroleum refining and marketing,
petrochemicals, retail, and telecommunications.
FCFF
Free cash flow to the firm (FCFF) is the cash available to pay investors after a company pays
its costs of doing business, invests in short-term assets like inventory, and invests in long-
term assets like property, plants and equipment. The firm's investors include
both bondholders and stockholders. Cash flows into a business when the company sells its
product (revenues, aka sales). Cash flows out to pay the costs of doing business: salaries,
rent, taxes, etc. Once expenses are paid, whatever is left over can be used to reinvest in the
business.

FCFF of reliance industry

Growth rate 3.5%

FCFF value indicates that the firm has cash remaining after expenses and positive FCFF
figure indicates that the business has the cash to reduce debt, expand or pay out dividends.
FCFF figures are increasing over time, this is a beneficial indicator for investors, showing
positive business health

FCFE
Free cash flow to equity (FCFE) is the cash flow available for distribution to a company’s
equity-holders. It equals free cash flow to firm minus after-tax interest expense plus net
increase in debt. FCFE is discounted at the cost of equity to value a company’s equity. Free
cash flow to equity is one of the two definitions of free cash flow: the other being the free
cash flow to firm (FCFF). In general, the term free cash flow refers to the free cash flow to
firm.
FCFE differs from FCFF in that the free cash flow to firm is the cash flow that is available for
distribution to both the debt-holders and equity-holders while the free cash flow to equity is
the cash flow that’s available only for distribution to equity-holders. After-tax interest
expense is subtracted from FCFF and net borrowing is added because they represent the
cash paid to and cash raised from debt-holders.
FCFE = Cash from Operating Activities – Capital Expenditures + Net Debt Issued (Repaid)

FCFE of reliance industry

Growth rate 4%
Free cash flow to equity is composed of net income, capital expenditures, working capital,
and debt. Net income is located on the company income statement. Capital expenditures
can be found within the cash flows from investing section on the cash flow statement.
Working capital is also found on the cash flow statement; however, it is in the cash flows
from the operations section. In general, working capital represents the difference between
the company’s most current assets and liabilities.
These are short-term capital requirements related to immediate operations. Net
borrowings can also be found on the cash flow statement in the cash flows from financing
section. It is important to remember that interest expense is already included in net income
so reliance do not need to add back interest expense.

WACC
WACC 10 %
Reliance weighted average cost of capital, or WACC, is typically a signal of the higher risk
associated with a firm's operations. Investors tend to require an additional return to
neutralize the additional risk. Reliance WACC can be used to estimate the expected costs
for all of its financing. This includes payments made on debt obligations (cost of
debt financing), and the required rate of return demanded by ownership (or cost of
equity financing). Most publicly listed companies have multiple funding sources.
Therefore, WACC attempts to balance out the relative costs of different sources to produce
a single cost of capital figure. company's WACC is higher than its actual return. This is an
indication the company is losing value, and there are probably more efficient returns
available elsewhere in the market.
Cost of debt
The cost of debt is the rate a company pays on its debt, such as bonds and loans. ... Cost of debt is
one part of a company's capital structure, with the other being the cost of equity. Calculating
the cost of debt involves finding the average interest paid on all of a company's debts

Cost of equity
Cost of equity. In finance, the cost of equity is the return (often expressed as a rate of return) a firm
theoretically pays to its equity investors, i.e., shareholders, to compensate for the risk they
undertake by investing their capital. Firms need to acquire capital from others to operate and grow.

Cost of debt = 10%

Cost of equity = 10.82%

Equity capital reflects ownership while debt capital reflects an obligation. Typically, the cost of

equity exceeds the cost of debt. The risk to shareholders is greater than to lenders since payment on
a debt is required by law regardless of a company's profit margins.

Levered beta
Levered beta measures the risk of a firm with debt and equity in its capital structure to the volatility
of the market.

Levered beta = 1.08

levered beta measures the sensitivity of that security's tendency to perform in relation to the overall
market. Levered beta includes a company's debt in the calculation of its sensitivity. Security with
positive levered beta signals that the security has a positive correlation with market performance.

Unlevered beta
Unlevered beta measures the market risk of the company without the impact of
debt. Levering a beta removes the financial effects of leverage thus isolating the risk due solely to
company assets.

Unlevered beta = 0.72

A beta of two means the company is twice as volatile as the overall market, but a beta of less than
one means the company is less volatile and presents less risk than the broader market
Conclusion

I have learnt about the FCFF and FCFF what uses of FCFF and FCFE what are their impact on the
business and why it is calculated by the company, levered and levered beta, and how debt and
equity ratios are effecting the company.