With Rs 300 per share cash, Reliance falls below Rs 700!

An expected drop in net profits by 20 percent in the third quarter of the current fiscal has resulted in Reliance Industries crashing below the Rs 700 mark. For a company sitting on Rs 300 in hard cash per share, a share price of Rs 700 means investors are getting a share of its business for Rs 400.

The stock breached the psychological-important barrier when an analyst pointed out that the company is likely to post a net profit of Rs 4,500 crore for the third quarter - a sheer drop of 21 percent over the previous quarter. This is largely due to a 40 percent drop in gross refining margins, which will be at $6 per barrel.

[caption id=“attachment_168913” align=“alignleft” width=“380” caption=“Lower gas production too will negate the dollar advantage the company has on its sales. Reuters”]  [/caption]

Further, the company is unlikely to benefit from rupee depreciation in this quarter. A report by Macquarie Securities says that the 11 percent rupee depreciation against the US dollar will not benefit the company as Reliance locks in currency at the time of booking crude purchases and product exports. This takes place a few months prior to deliveries.

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Lower gas production too will negate the dollar advantage the company has on its sales. Production of gas has touched levels of 41 mmscmd, below levels seen at the time of commissioning the well.

 However, on a valuation basis, most analysts are bullish on the company as it currently trades at book value. Macquarie says that at the present valuation, the upstream business of the company is available for free as BP has paid nearly as much to buy a 30 percent stake in Reliance’s Krishna-Godavari offshore fields.

Reliance was sitting on a cash pile of Rs 61,490 crore as on 30 September 2011. Add to this the $7.2 billion the company received from BP, and the cash rises to Rs 97,000 crore. Kotak expects the company to generate Rs 88,000 crore is gross cash flows over the next two years. Compared to this the stock currently trades at a market capitalisation of Rs 2,26,428 crore.

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In other words the company is sitting on nearly Rs 300 per share of cash. The market is valuing Reliance’s business - with further cash flows of Rs 88,000 crore over the next two years - at just Rs 400 today.

Looked at from a valuation perspective two years hence (2013-14), the market is paying Rs 700 today for a company that will have 85 percent of its share value in cash.