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Reliance Industries Ltd: Uncovering its Complexities and Unveiling its True Essence
Bragging Rights
Fun Finds
Ending on a High Note…
Reliance Industries Ltd: Uncovering its Complexities and Unveiling its True Essence
Reliance Industries Ltd: The Behemoth of Indian Industry
Reliance Industries Ltd, the Indian conglomerate led by Mukesh Ambani, has become a behemoth in the business world. With interests in areas such as refining, petrochemicals, oil, and gas exploration, the company is a force to be reckoned with.
Established in 1966, the company has a long history of growth and success. Its oil-to-chemicals segment alone accounts for over half of its revenues, with its refining business being one of the largest in the world. The retail segment, too, is no slouch, with over 11,000 stores across India.
And then there's Jio, the digital services business that's taken the country by storm. Offering mobile services, broadband, and e-commerce, Jio has disrupted the market and become one of the fastest-growing businesses in India.
Revenue Breakdown
The oil-to-chemicals segment of Reliance Industries Limited (RIL) is one of the company's largest revenue contributors, accounting for approximately 57% of its total revenues. This segment includes businesses such as refining, petrochemicals, and the marketing of fuels. The refining business is one of the largest in the world, with a capacity of over 1.4 million barrels per day. The petrochemicals business is also one of the largest in the world, producing a range of products such as polyester fibres, plastics, and chemicals.
The retail segment is another significant contributor to RIL's revenues, accounting for approximately 23% of the total. RIL operates one of the largest retail networks in India, with over 11,784 stores across the country. The retail business includes supermarkets, convenience stores, and electronics stores.
The digital services business, Jio, is a subsidiary of RIL and one of India's fastest-growing businesses. Jio offers a range of digital services, including mobile services, broadband, and e-commerce. This business contributes approximately 11% of RIL's total revenues.
The oil and gas exploration and production (E&P) business is a smaller contributor to RIL's revenues, accounting for approximately 1% of the total. This business involves exploring, developing, and producing oil and gas fields. Despite its small contribution to RIL's revenues, the E&P business is an important part of the company's strategy, as it provides a source of raw materials for its refining and petrochemical businesses.
Revenue, Net income, Free cash flow
Fundamental Analysis
I believe it is crucial to have a set of well-defined metrics that assist in evaluating the performance and potential of a company. In my practice, I utilize several key metrics that provide insight into a company's financial health and future prospects. These metrics include a 5-year Price-to-Earnings ratio of less than 22.5, a 5-year Return on Invested Capital of more than 9%, a Long-term Liabilities to Free Cash Flow ratio of fewer than 5 years, a Price-to-Free Cash Flow ratio of less than 20, a reducing Outstanding Shares, current assets > current liabilities, an upward trend in Revenue, an upward trend in Net Income, and an upward trend in Free Cash Flow.
Using these metrics, let's examine the performance of Reliance. Unfortunately, the results are not favourable. The company has a 5-year Price-to-Earnings ratio of 30.01, which is well above the benchmark of 22.5 and may indicate that the stock is overvalued. Additionally, the 5-year Return on Invested Capital of 3.89% is significantly below the benchmark of 9%, indicating that the company's capital management and profitability may not be optimal. Furthermore, the Long-term Liabilities to Free Cash Flow ratio of 28.74 is alarmingly high, indicating that the company may have difficulty servicing its long-term debts.
Additionally, the Price-to-Free Cash Flow ratio of 140.66 is also well above the benchmark of 20, indicating that the company may not be generating enough free cash flow to support its stock price. Unfortunately, the trend of Outstanding Shares is increasing, further diluting the ownership of existing shareholders. On the positive side, the company has seen an increase in Revenue and Net Income and current assets > current liabilities, which is a good sign. However, the Free Cash Flow has been inconsistent, which raises concerns about the company's ability to fund future growth.
Based on the metrics discussed above, Reliance does not appear to be a financially strong company. Although it has seen growth in its Revenue and Net Income, the high valuations and poor performance in other key metrics raise significant red flags. As an analyst, I would advise caution when considering this company as an investment opportunity. Further research and analysis are necessary to determine if the company's current performance is temporary or if it is indicative of deeper problems.
Estimations
The Price You Should Pay
Reliance Industries Ltd is currently trading at a price of 2336.50. I am often asked about the fair value of a company's stock and whether it is overvalued or undervalued. To answer this question, I use analyst estimations for Free Cash Flow and calculate the average fair value for various return expectations.
Using this methodology, the average fair value for a 7.5% return is 1305.33. This indicates that if an investor were to invest in Reliance Industries Ltd at the current price and expect a 7.5% return on their investment, the stock may be overvalued by approximately 1031.17. The average fair value for a 10% return is 679.04, which implies that if an investor were to invest in the company with a return expectation of 10%, the stock may be overvalued by 1557.46.
Similarly, the average fair value for a 12.5% return is 371.3, indicating that the stock may be overvalued by 1965.20. The average fair value for a 15% return is 190.33, suggesting that the stock may be overvalued by 2146.17. Finally, the average fair value for a 20% return is -10.09, which means that the stock may be significantly overvalued even with a return expectation of 20%.
It is important to note that these calculations are based on analyst estimations and may not accurately reflect the actual fair value of the stock. Nevertheless, the results suggest that Reliance Industries Ltd may be overvalued at the current price, and investors should be cautious when considering this stock as an investment opportunity. Further research and analysis are necessary to determine if the company's performance and future prospects justify the current valuation.
The current price of Reliance Industries Ltd may not align with the average fair value calculated using analyst estimations for Free Cash Flow. This discrepancy raises significant concerns about the stock's overvaluation and may indicate that the company's performance and future prospects are not adequately reflected in its current price. I would advise caution when considering this stock as an investment opportunity and recommend that investors perform additional research and analysis to determine the fair value of the company.
Conclusion
In conclusion, Reliance Industries Ltd is a massive conglomerate with interests in refining, petrochemicals, oil, and gas exploration, retail, and digital services. Despite its size and growth in Revenue and Net Income, the company's financial health raises significant red flags based on key metrics such as the 5-year Price-to-Earnings ratio, 5-year Return on Invested Capital, Long-term Liabilities to Free Cash Flow ratio, Price-to-Free Cash Flow ratio, and trend of Outstanding Shares. I would advise caution when considering this company as an investment opportunity and recommend further research and analysis to determine if its current performance is temporary or indicative of deeper problems. The average fair value calculated for various return expectations also suggests that the stock may be overvalued.
Bragging Rights
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Fun Finds
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Ending on a High Note…
Credits
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