EL LABORATORIO MUNICIPAL DE MURCIA Y EL INSTITUTO PROVINCIAL DE HIGIENE

VALUATION OF RIL

Reliance Industries Limited, India‟s largest private sector conglomerate, reported an annual turnover of Rs 1, 33,443 Crores and net profit of 19,458.29 Crores in year 2007-2008. With 1453648601 outstanding shares, RIL has an EPS Rs 133.86. Earnings per Share serve as an indicator of a company's profitability. Higher the EPS, higher is the profitability of the company.

Reliance Industries have maintained increasing earnings per share from last 5 years. In 2007-2008 it showed a 63% of increment from last year‟s 82.16. Thus, with the data of EPS, the growth of RIL looks promising.

DPS: Dividend per Share is the amount that shareholder will receive for the each share they own. Dividend is distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. RIL has been continuously paying dividend to its share holders from last five years. The value of DPS has increased from 5.25 in 2003-04 to Rs 13 in 2007-08.

As per my observations and understanding, there has been a change in calculating the DPS for the company since 2006-07. Since this year the DPS is calculated on total outstanding shares minus shares held by subsidiary companies on which no voting rights are exercisable and petroleum trust. Hence, total shares for calculating DPS are:

By doing so, the total amount of equity dividend is lowered and hence a lesser amount of tax has to be paid as dividend tax. Thus the total retained earnings of the company are increased at a particular Dividend per Share (DPS).

OPERATING PROFIT PER SHARE: It is a measure of company's earning power from ongoing operations. This is equal to earnings before deduction of interest payments and income

105 taxes. Operating profit is also called EBIT (earnings before interest and taxes) or operating income. Reliance Industries Limited has been showing a considerable growth in the operating profits. In 2007-08 it has shown a total growth of 13%, it has increased from 163.90 in 2006-7 to 185.74 in 2007-08.

Figure 13: Pe rcentage Growth

BOOK VALUE PER SHARE: It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. It is also called the net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities. RIL has shown an increasing book value of the company for last 5 years. Thus is reduces the risk factor for the investors. Since the inception of the company, it has been trying to increase the net worth of the investors and in the process it has today become the second largest private sector conglomerate in the world.

The Book Value per share has increased from 246.73 in 2003-04 to 649.12 in 2007-08, hence showing a growth of 163%.

Figure 12: Operating Profit per Share

106 Figure 14: Book Value per Share

PROFITABILITY RATIOS: Coming to the Profitability Ratios of the company, Reliance Industries has an operating margin of 17.47% in 2007-08. Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.

For operating margin to increase, the difference between sales and cost has to increase. So, if a company is able to sell a given quantity at a higher price without a corresponding increase in expenses, margins are likely to expand.

In 2007-08, sales of RIL increased by 19% and the expenses also rose by approximately 19%.

Hence the operating margin of the company is pretty similar to its previous year performance.

Thus the company has successfully maintained its operating margin over the years.

Gross Profit Margin: It is a financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.

Firms that have a high gross profit margin are more liquid and thus have more cash flow to spend on research & development expenses, marketing or investing. Generally, investors

107 avoid investing in firms that have a declining Gross Profit Margin over a time period, example over 5 years.

Looking into the Gross Profit Margin of RIL, we notice that the company has been able to increase its profit margin by a nominal value. Hence, the company seems to be a nice investment. The gross profit margin of RIL has improved from 12.74% to 13.83% in last five years.

Figure 15: Gross Profit Margin

Net Profit Margin: Net Profit Margin tells exactly how the operations of a business are performing. Net Profit Margin compares the net income of a firm with total sales achieved.

The formula for Net Profit Margin is:

If Gross Profit Margin of a company is very high when compared to Net Profit Margin of the company, this means that a huge amount of earnings is being allotted to marketing or administrative expenses. When we see the Net Profit Margin and Gross Profit Margin of the company, we realize that only a considerable amount of revenue is being used for administrative and marketing expenses. In 2006-07 the Gross Profit Margin and Net Profit Margin of the company were 10.69% and 13.64% respectively.

108 Figure 16: Gross and Net Profit Margin

Return on Net Worth: It is also known as return on equity (ROE). It is an indicator of profitability and investors use ROE as a measure of how company is using its money.

RIL has shown a considerable stability in the RONW of the company. Thus, the company has been using the shareholders money efficiently. In 2007-08 the RONW of the company grew to 23.89% from previous years 18.67%.

Figure 17: Return on Net Worth

109 LEVERAGE RATIOS

Total debt to equity Ratio: The debt to equity ratio is used for measuring solvency of a company. It indicates how much the company is leveraged, in other words it measures the company‟s ability to borrow and repay the money.

Debt to equity ratio is closely watched by creditors and investors because it reveals the extent to which company management is willing to fund its operations with debt. Lenders are particularly sensitive to this ratio as an excessive high ratio value will put their loans at risk of not being repaid.

By using debt in the company finances, it is able to have interest and depreciation tax shield due to the tax paid on the debt interest. However no such tax benefit is achieved when fund raising is done through equity.

Ratios 2008 2007 2006 2005 2004

D/E Ratio 0.45 0.44 0.44 0.46 0.61

Thus from the above table it is clear that RIL has maintained its debt to equity ratio around 0.45 over last 5 years. This means that neither the ratio is too high (risky for the lenders) nor it is too low (entitling the business to leverage and earn higher returns on equity).

Fixed Asset Turnove r Ratio: The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.

Ratios 2008 2007 2006 2005 2004

Fixed assets turnover ratio 1.28 1.12 0.96 1.20 0.97

110 RIL has a very high fixed assets turnover ratio, thus the company has been efficiently using the fixed assets to generate its revenues.