Analyst Research Report Snapshot






Motilal Oswal Securities Ltd.


25 Jun 2014





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ANNUAL REPORT THREADBARE (ART): RELIANCE INDUSTRIES FY14 Reliance Industries Ltd's (RIL) annual report analysis for FY14 highlights INR15.3b (5.3% of FY14 PBT) directly adjusted through reserves due to various schemes of amalgamation/arrangement. Adjusted book value of the company is lower by INR65/sh at INR611/sh at FY14-end on account of revaluation of assets done previously. Hence, adjusted RoE is higher by 140bp to 13.2%. Amalgamation of subsidiaries results in net worth being lower by INR15.3b RIL had undertaken realignment and consolidation of various subsidiaries of its retail business. It also merged other subsidiaries based on the High Court approval in FY14. The effect of the above schemes resulted in FY14 net worth being lower by INR15.3b (5.3% of PBT; 0.8% of net worth). Adjusted BV lower by 10%, adjusted RoEs higher by 140bp RIL carried out two major revaluations of fixed assets - INR225b in FY06 and INR129b in FY09, with consequent increase in the revaluation reserve. Further, the company has cumulatively adjusted INR198.2b (INR191.2b in FY06 and INR7b in FY09) through the revaluation reserve on account of demerger of certain ventures in FY06. This resulted in the revaluation reserve being exhausted in standalone books in FY14 and incremental depreciation on revalued assets of ~INR8b being routed through general reserve. Our calculation suggests revalued assets in excess of INR190b (~10% of reported net worth) to be depreciated through general reserve in the coming years. DTA on carried forward loss of subsidiaries of INR12.1b during FY14 Extrapolating the DTA on carried forward loss (assuming Indian corporate tax rate of 34%), these DTAs would point to losses worth INR35.6b in subsidiaries business during FY14. However, as per the subsidiaries details given in the annual report, cumulative loss made by all subsidiaries adds up to only INR11b in FY14 (FY13 INR11.1b). We believe partly this could be on account of exchange rate fluctuations during the year and different tax rates of foreign subsidiaries. Largest capex in company's history RIL is making investments of ~INR1.8t over three years across all its businesses, which will be spent for its petrochemicals, telecom and retail segments. Of this, INR700b (~39%) is proposed to be spent in its telecom business. Company spent INR601b in FY14 for its capex requirements (FY13 INR307b) for polyster expansion, petcoke gasification project and investments for shale gas and telecommunication business. Of the fixed assets (net) of INR2.3t as at FY14-end, INR915b (~40%) is still under construction and not yet capitalized. On capitalization of these projects, depreciation is likely to increase in the coming years. Forex difference of ~INR107b capitalized as fixed assets As per the company’s accounting policy, any foreign long term liabilities related to the acquisition of fixed assets are adjusted to the carrying cost of such assets. Additions to fixed assets (tangible + intangible) stood at INR231b in FY14 (FY13 ~INR90b). Also, the company has a net increase of INR415b (FY13 INR246b) in capital WIP during FY14. The above amounts include INR107b (37% of FY14 PBT) capitalized in FY14 on account of foreign exchange differences arising on long term foreign currency loan (FY13 INR60b; 23% of FY13 PBT) in line with its accounting policy. This will result in higher depreciation in the coming years.

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