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MANAGEMENT
RELIANCE
INFASTRUCTURE
LIMITED
1
Objective: The objective of our project is to apply the
various tools we have learned in the course of Financial
Management II on the financial reports of Reliance
Infrastructure and analyze the company statistics.
Methodology:
In this project we have tried and used the various tools
learned like Ratio analysis, Fund Flow, Cash flow analysis,
Capital structure and its implication.
Background:
Reliance Infrastructure
Anjana Khanduri
Reliance Infrastructure Ltd is one of the India’s largest private sector enterprises in
power utility. In the power sector it is involved in generation, transmission,
distribution and trading of electricity and constructing power plants as EPC partners.
In the infrastructure space the company is focused on roads, urban infrastructure
which includes MRTS, Sea link and Airports, Specialty Real Estate which includes
business districts, trade towers, convention centre and SEZ which includes IT & ITES
SEZ and non IT SEZ as well as free trade zones.
2
Business Overview
Distribution Airport
Competitor analysis
Top infrastructure companies of India
2. Maytas Infra Limited: This leading player in the infrastructure segment has
more than 20 years of experience in infrastructure development, construction
and project management.
(Rs in Crores)
3
Particulars Year ended 31 Mar, 2009 Year ended 31 Mar, 2008
Turnover 1335 1637
Net Profit/Loss (-) 489.79 99.64
(Rs in Crores)
(Rs in Crores)
(Rs in Lakhs)
Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Equity Share
Capital 185.61 212.36 228.57 235.62 226.07
5,009.0
debt 3,738.67 4,266.93 5,858.32 4 7,332.18
interest paid 134.82 191.88 250.32 308.76 330.5
0.06164
interest rate 0.036060952 0.044969 0.042729 1 0.045075
10,024.
Reserves 4,834.10 6,820.51 8,412.74 16 10,308.14
15,268.
total 8,758.38 11,299.80 14,499.63 82 17,866.39
Data Values
Covariance of BSE and Reliance 0.027066864
variance 0.008824014
Beta of stock 3.067409387
market return monthly 0.015419002
annual return 0.185028029
Risk free return 0.07
require rate of return 0.422838056
weighted cost of capital 0.280176117
As per the above table its clear that if the company would employ equity as
a cost of fund only if it is sure to earn more than 42%.
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The cost of equity and debt explains two things.
1) CAPITAL STRUCTURE
2) DIVIDEND POLICY
Capital Structure
Over a period of time the total debt of reliance infrastructure has risen
considerably as compared to equity share capital. The rise in debt in 2009
has been almost 47% as compared to the previous year. The substantial rise
in debt increases the leverage and risk for the company. But the substantial
rise in debt could be attributed to the cost of debt as compared to equity.
The increase in substantial debt over a period of time has also increased the
cost of debt for the company from 4.2% to 6.2 % due to more leverage. This
could be explained by Walter and Gordon model of capital structure model
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Dividend paid by reliance infrastructure:
DIVIDEND POLICY :
The dividend pay out by the company is almost on a constant basis and has
increased in the period of 2007 and constant till 2009. The constant
dividends pay out shows that the company does not want to retain equity as
it cost them more than Debt.
The dividend payout on respective days also displays how investors react to
the dividend pay out of a company. As the company has announced the
dividends the day on which dividends were given shows a tremendous price
gain as compared to the prices of the previous day.
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Financial ratios
Face Value 10 10 10 10 10
Operating Profit Per Share (Rs) 36.24 35.99 21.75 22.82 19.22
Net Operating Profit Per Share 223.99 186.7 251.72 268.76 426.42
(Rs)
Free Reserves Per Share (Rs) 227.62 292.31 339.74 371.2 396.55
Profitability Ratios
Profit Before Interest And Tax 4.32 7.66 3.98 4.45 1.78
Margin(%)
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(%)
Long Term Debt Equity Ratio 0.72 0.42 0.16 0.06 0.14
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EARNINGS RATIOS
The solvency or leverage ratios throws light on the long term solvency of a
firm reflecting it’s ability to assure the long term creditors with regard to
periodic payment of interest during the period and loan repayment of
principal on maturity or in predetermined instalments at due dates. There
are thus two aspects of the long-term solvency of a firm.
The ratio is based on the relationship between borrowed funds and owner’s
capital it is computed from the balance sheet, the second type are
calculated from the profit and loss a/c.
The cash debt coverage ratio shows the percent of debt that current cash
flow can retire.
Significance:
A cash debt coverage ratio of 1:1 (100%) or greater shows that the company
can repay all debt within one year.
Analysis:
Reliance has consistently maintained a cash debt ratio of more than 1 since
2005. Company wise analysis shows that it is less than the industry sector
average.
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A ratio that indicates a firm's ability to satisfy fixed financing expenses, such
as interest and leases.
Analysis:
Reliance has maintained a double digit fixed charge ratio which determines
that it has that much times cash to cover its fixed charges. The industry
average has increased because of Reliance’s high ratio which is twice as
much as other companies in the infrastructure sector.
The ratio of equity and capital employed represents the amount of equity
funding in the total capit employed.
Formula
Analysis
IT is the ratio of sales to fixed assets. This ratio indicates the extent that the
investment in total assets results in sales.
Formula
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Fixed assets turnover = sales/fixed assets
Analysis
• ompanies with low profit margins tend to have high asset turnover,
those with high profit margins have low asset turnover - it indicates
pricing strategy.
• This ratio is more useful for growth companies to check if in fact they
are growing revenue in proportion to sales
We see the result of 1.2 for 2005 this means that turnover is 1.2 times
bigger than total assets. Another way of saying that is that the Reliance
infrastructure was able to generate sales of Rs.1.56 for every Rs.1 of assets it
owned and used for the year ended 31 March 2006. For the year ended 25
March 2006, it was at 0.95 times.Currently it has a ratio of 1.01.
Long term debt Equity ratio
It indicates the proportion of the company’s assets that financed with long-
term debt.
Formula
Long term debt Equity ratio = long term debt / total assets
Analysis
PROFITABILITY RATIOS
They compare components of income with sales. They give us an idea of
what makes up a company’s income and are usually expressed as a portion
of each rupee of sales.
It is the ratio of gross income or profits to sales.This ratio indicates how much
of every rupee of sales is left after costs of goods sold
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Formula
Analysis
Reliance enjoys a gross profit of 13.35% which means that for every rupee of
sales it earns 13.35 rupees apart from its cost on goods sold. Gross profit is
the profit we earn before we take off any administration costs, selling costs
and so on. So we should have a much higher gross profit margin than net
profit margin.
Formula
Analysis
It indicates how much of each rupee of sales is left over after operating
expenses. Reliance enjoys an operating margin of 17.01.whereas the
industry average is of 31.16.
It indicates how much of each rupee of sales is left over after all expenses.
Formula
Analysis
The net profit margin ratio tells us the amount of net profit per £1 of turnover
a business has earned. That is, after taking account of the cost of sales, the
administration costs, the selling and distributions costs and all other costs,
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the net profit is the profit that is left, out of which they will pay interest, tax,
dividends and so on.
Formula
Net Income
Shareholder’s Equity
Analysis
The Return on Capital Employed ratio (ROCE) tells us how much profit we
earn from the investments the shareholders have made in their company.
Think of it this way: if we had a savings account with a bank and we'd been
paid, say, £25 interest at the end of a year; and we had saved £500, we
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could work out the rate of interest we had earned:
Formula
Interest
Rate of earned *
=
interest Amount 100
saved
Analysis
This ratio establishes the relationship between net profit and the gross
capital employed. The term gross capital employed refers to the total
investment made in business. The conventional approach is to divide
Earnings After Tax (EAT) by gross capital employed. Reliance Infrastructure
has an ROCE of 11.34 as compared to the industry average of 13.1375.
LIQUIDITY RATIOS
It measures the ability of the firm to meet its short-term obligations, that is
capacity of the firm to pay its current liabilities as and when they fall due.
Thus these ratios reflect the short-term financial solvency of a firm. A firm
should ensure that it does not suffer from lack of liquidity. The failure to
meet obligations on due time may result in bad credit image, loss of creditors
confidence, and even in legal proceedings against the firm on the other hand
very high degree of liquidity is also not desirable since it would imply that
funds are idle and earn nothing. So therefore it is necessary to strike a
proper balance between liquidity and lack of liquidity.
The various ratios that explains about the liquidity of the firm are
1. Current Ratio
2. Acid Test Ratio / quick ratio
CURRENT RATIO
The current ratio measures the short-term solvency of the firm. It establishes
the relationship between current assets and current liabilities. It is calculated
by dividing current assets by current liabilities.
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Current Ratio = Current Asset
Current Liabilities
Analysis
Current liabilities
Quick assets are those current assets, which can be converted into cash
immediately or within reasonable short time without a loss of value. These
include cash and bank balances, sundry debtors, bill’s receivables and short-
term marketable securities.
Analysis
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Inventory Turnover Ratio = Cost of goods sold
Average Inventory
The average inventory is simple average of the opening and closing balances
of inventory. (Opening + Closing balances / 2). In certain circumstances
opening balance of the inventory may not be known then closing balance of
inventory may be considered as average inventory.
Analysis
INDEX ANALYSIS
Years Mar '05 Mar '05 Mar '07 Mar '08 Mar '09
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9 3 36
Total Debt
19
Cash and Bank Balance 100.00 0.32241 30.4755 2.3476 6.772621
5 8 72
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• The total liabilities have increased almost double of 2005 whereas the total
current assets have become less than 50% of the
• The loans and advances in 2009 the company has increased to almost 500%
of the year 2005. On the other hand the companies’ contingent liabilities
have also increased substantially by 600% in 2009 as compared to 100 in
2005.
• The total share capital has seen a minor rise of 21% over 5 years in 2009 to
121 as compared to 100 in 2005
• Companies total assets have decreased almost 50% and bank balance hardly
6% in 2009 as compared to 2009. Over the period of time a fall in the
current asset and specially bank balance shows a a threat of liquidity crunch
in the company.
Year Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Preference Share 0 0 0 0 0
Capital
21
Unsecured Loans 29.30647 19.3334 29.1054 23.2633 28.5029
4 6
Deffered Credit 0 0 0 0 0
22
Current Liabilities 17.74599 15.1801 16.6941 17.37111 26.0827
3 3 9
Miscellaneous Expenses 0 0 0 0 0
References:
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ANEXXURE:
25
0.08181367
9
26
5/2/2008 16415.57 - 1174 -0.242946961
0.05042658
5
27
7/1/2009 15670.31 0.08117034 1022.4 0.038285772
5
2.variance 0.008824
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6.Risk free return ( Return from Government securities) 0.07
Rf
29