Wheres The Cash?

Reliance Industries has always had a strong treasury. The story goes that the company's excellent cash management is based on one principle: "Never wait to borrow till you actually need the money." That makes a lot of sense, because lenders will always be in a better bargaining position if a company cannot do without funds. Timing a company's entry into the market for funds is therefore crucial. RIL has always had a comfortable cushion of funds, which it has deployed in its treasury opertions.

An idea of the amount of cash that RIL can put up can be obtained from the fact that in 1999-2000, Reliance Industries' cash generation from operations amounted to Rs 1,687.12 crore. That's low for the company, lower than the Rs 2806.42 crore generated in 1998-99, mainly on account of a substantial increase in receivables and inventory.

 

Will the company's nest egg of investments help? As on March 31, 2000, Reliance had Rs 6,066.56 crore worth of investments, valued at book value but a large part of this is not liquid, consisting of investments in subsidiaries. Its investment in Reliance Petroleum, for instance, is Rs 2157.62 crore. However, RIL also has a lot of easily available funds _ it had Rs 2124.87 crore in investment management accounts with the Union Bank of Switzerland and with Credit Suisse. It also had a lot of loose cash _ cash and bank balances amounted to Rs 1081.55 crore.

But not all these funds are free for investment in the group's ICE ventures. One use of funds already earmarked is the share buyback proposal, which will absorb Rs 1,100 crore. RIL has completed its ongoing expansion plans with the completion of the petrochemical manufacturing complex at Jamnagar. It has, however, announced plans for doubling its polyester capacities, increase of PTA and MEG capacities in line with polyester expansion, and de-bottlenecking of ethylene and PE capacities. But that will be over a period of time.

In any case, finance is unlikely to be a problem for Reliance. It is worth noting that cash generated from operations would have been much higher but for the increase in receivables and stocks. Tighter working capital management will therefore release resources. Before working capital changes, cash flow amounted to Rs 3,766 crore in 1999-2000. Also relevant is the debt-equity ratio, which, net of revalution reserves, was 1:1. Total outside liabilities amounted to 1.4 times tangible net worth as at end-March, a conservative level, with enough scope for raising more debt.

Bankers usually take the upper limit of 2:1 for the TOL/TNW ratio, which means the company could raise over Rs 7,000 crore worth of debt alone, if necessary, without any difficulty. Interest cover is very comfortable. Securitisation of future receivables is also another option which the company has explored. RIL's cash hoard has consistently been used by the group for investment in group companies. For example, in 1999-2000, RIL invested large amounts in group companies through loans to its subsidiary, Reliance Ventures.

Outstandings on account of loans given to its subsidiaries as on March 31, 2000, amounted to Rs 2,411.16 crore, an increase of Rs 2,051.68 crore during the year. The bulk of the loan was to new company Reliance Ventures, which in turn invested in Reliance Polyolefins Pvt Ltd (Rs 420 crore); Reliance Chemicals Pvt Ltd (Rs 320.5 crore); Reliance Aromatics and Petrochemicals Pvt Ltd (Rs 339.41 crore) and Reliance energy and Project Development Pvt Ltd (Rs 339.41 crore). RIL has therefore acted as an investor in and lender to group companies. It can easily take a similar route for funding the group's ICE ventures.