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Relying on Reliance

6 June 2012 By Jeff Glekin

Reliance Industries is underperforming. Yet the hydrocarbon-rich conglomerate, which is controlled by Mukesh Ambani, India’s richest man, also has a cash mountain of $13.8 billon which it does not seem to know how to spend.

As returns have dwindled from core businesses, the proportion of profits from its treasury operations has surged. They accounted for as much as 42 percent of the total in the March quarter, roughly triple last year’s share. Reliance is now generating more profit from cash management than from exploration, and the contribution is almost equal to gains from refining. It’s nice to have such an efficient treasury, but it raises big questions about the sustainability of the overall Reliance business model.

Reliance posted its second consecutive quarter of declining profits in April, as refining margins fell and the firm struggled to boost production at the natural gasfield it co-owns with BP. Net profit for the three months to March fell 21 percent. Even so, Reliance generates up to $1 billion in free cash every quarter. The pile is three times what it was two years ago, and is now equivalent to around 40 percent of the company’s net worth.

Its shares, meanwhile, have lost 18 percent since February 2012, compared to an 8.6 percent fall in the benchmark SENSEX index.

Last year, Ambani outlined a big drive into consumer-focused businesses. But its retail business is loss-making even after six years. Investors must be worried about the billions spent getting into a fiercely competitive and unpredictable telecoms sector. A sizeable new investment in the energy sector might reassure. And perhaps the slow progress on the share buyback suggests something is cooking. But if management does not have firm plans to spend the spare money, the pressure to return more cash to shareholders will increase. In January, Reliance announced a $2.1 billion share buyback. So far less than a quarter of that sum has been spent. Reliance’s dividend yield of 1.2 percent is below the SENSEX average of 1.8 percent.

Rather than allowing the AGM on June 7 to turn into the usual cakewalk, investors should make their voices heard. Reliance shareholders are in need of commercial and financial refreshment.


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