Falling cash reserves, high debt to hit RIL

Falling cash reserves and increasing debt are expected to reduce treasury income for Reliance Industries Ltd (RIL) in the current fiscal year as the company will have less cash to invest in instruments such as mutual funds and government bonds, among others.

RIL, which is in the midst of its biggest capital expenditure cycle, is investing up to $24 billion over a five-year period since fiscal 2013 across businesses ranging from refining, petrochemicals and fourth-generation telecom services.

“These investments will need a constant supply of equity from the company’s cash reserves and will definitely keep the treasury income of the company under check,” said S.P. Tulsian, an independent investment advisor.

The trend was visible in fiscal year 2015, when cash reserves and treasury profits both fell marginally.

“...a significant portion of FY2015 (financial year 2014-15) capital expenditure of US$16 bn was funded by US$6 bn of cash profits and US$5 bn of working capital savings,” said a 18 April note by Kotak Securities Ltd.

In turn, RIL’s treasury income fell to Rs.8,721 crore in 2014-15, down 2.5% from a year ago. Its share in the company’s net profit also came down to 38% from 41% a year ago.

An email sent to RIL on Thursday seeking details of treasury income earned remained unanswered.

Analysts say the contribution of treasury income could fall further over the next couple of years and hit levels last seen in 2010-11.

According to Bloomberg data, the stand-alone treasury income of RIL contributed 30.9% at Rs.6,192 crore for the financial year 2010-11. Since then, the contribution of treasury income has risen, hitting 40% in 2013-14. In that year, RIL reported a treasury income of Rs.8,936 crore, as part of the overall net profit of Rs.21,984 crore.

“While we are expecting net profit to increase; we believe, going forward, the company’s cash and cash balances will fall further and debt levels will keep increasing. This will reduce the influence of the company’s other (treasury) income in its overall bottom line,” acknowledged an analyst who is the head of energy coverage for the Indian arm of an international brokerage firm.

He did not want to be quoted due to his company policy.

As of 31 March 2015, RIL had a total outstanding debt of Rs.160,860 crore, up 16% from a year earlier, and total cash and cash equivalent of Rs.84,472 crore, down 4.4% from Rs.88,190 crore a year ago.

A 20 April report by UBS Securities India Pvt. Ltd pointed out that RIL, which turned a net debt company in 2013-14, will continue to remain so till 2017-18, with net debt estimated at Rs.18,400 crore in 2017-18 due to its capital expenditure.

While treasury income, recorded in the books of the company as other income, has helped prop up earnings for RIL, some analysts believe the focus will now shift to core profits.

Jal Irani, an analyst with Edelweiss Securities Ltd, in a 20 April report said the capital expenditures being undertaken by RIL currently, including investments in its telecom venture, have the potential to double the net profit of the company in the next five years.

“While it is difficult to say by how much it will fall, going forward, this trend of falling income from treasury operations will continue,” said Dhaval Joshi, an analyst with brokerage Emkay Global Financial Services Ltd, adding that it is a good sign for the company as it will start to see larger contributions from core divisions such as refining and petrochemicals.