Reliance Industries: Key financial ratios fall to three-decade low in FY21

On a consolidated basis, firm's RoCE declined to 7.8% in the fiscal

Reliance Industries, the country’s biggest company by market capitalisation, was the top loser among index stocks for the second consecutive day on Friday. The oil to telecom major’s share price was down 2.2 per cent on Friday against 0.42 per cent rise in NSE Nifty50 index.

RIL’s stock price declined despite a big expansion and diversification plan announced by the company’s Chairman Mukesh Ambani at its annual general meeting on Thursday. Ambani announced multi-billion-dollar investments in solar energy, a foray into 5G mobile technology, and plans to launch a new affordable 4G-enabled smartphone.

The Street has, however, been cool to the RIL stock for some time now, and it has underperformed the broader market over the past year. RIL’s stock price has been almost flat since last July — up just 2 per cent, against a 44 per cent rally in the Nifty50 index.

One of the reasons for RIL’s poor show on the bourses in the last 12 months is the steady decline in its profitability ratios, such as return on capital employed (RoCE) and return on net worth (RoNW) in recent years. This is because the company’s earnings have not kept pace with the rapid growth of its balance sheet and capital employed in the business.

The company’s RoCE on consolidated basis declined to 7.8 per cent in financial year 2020-21 (FY21) — the lowest in at least three decades. Similarly, the company’s RoNW declined to a low of 8.4 per cent last fiscal, according to data from Capitaline database.  (See the adjoining chart).

In other words, the company’s returns from its large asset base – the biggest in India Inc – is just a notch above the yield on top-rated corporate bonds.

In comparison, Nifty 50 companies reported RoNW of around 14.9 per cent on average in FY21.

The company’s net worth has tripled in the last five years from Rs 2.3 trillion at the end of FY16 to Rs 7 trillion at the end of March. Over the same period, RIL’s total assets more than doubled from Rs 5.97 trillion at the end of March 2016 to Rs 12.43 trillion at the end of FY21. The company’s consolidated net profit – adjusted for exceptional gains and losses – were up by around 50 per cent from around Rs 29,800 crore in FY15 to around Rs 43,800 in FY21.

RIL is also one of the lowest dividend payers among top companies, proportionate to its revenues and balance sheet size. The company paid a total equity dividend of Rs 4,512 crore in FY21. In comparison, Tata Consultancy Services – the country's second biggest company in terms of market cap – distributed nearly Rs 30,000 crore among its shareholders by way of dividend and share buybacks last fiscal.

Relatively slower growth in earnings have also created a wedge between RIL’s market cap and earnings growth. The company’s market cap has quadrupled in the last five years from Rs 3.38 trillion to Rs 13.35 trillion on Friday, making it one of the most expensive index stocks. The stock is trading at trailing price to earnings multiple of 31X, against Nifty 50 earnings multiple of 29.2X.

The bulls, however, say RIL's disproportionately large balance sheet provides it with the financial muscle to become a quasi-monopoly player in emerging sectors such as mobile telephony, retail, e-commerce, and now green energy. “This provides a huge earnings potential for RIL in future and that’s why investors are betting on the stock despite relatively poor earnings growth in the last few years,” says an analyst on condition of anonymity.

It is to be seen if this latest diversification strategy by India’s largest company will deliver faster earnings growth that shareholders expect.