Reliance Results in Graphs. I think this is the best way to view these things.

Revenues are up, Profits are down.

And they’ve kinda sorta killed their EPS growth:

And while revenues in Refining have gone up substantially, EBIDTA on each operating segment has gone down:

They have some serious cash now (after they got lots of it from BP):

Their Oil and Gas Business isn’t lookin’ good.

With Libya coming back up, the light-heavy differential narrowed, and eventually the Gross Refining Margins hurt as well:

There are no real numbers on the new businesses (retail and broadband/web).

The Buyback is on, with a max price of Rs. 870 per share. The share closed at Rs. 792 today (results came in post-market), which means the limit is 10% higher. They’ll use 10,000 cr. of cash to buy these shares back. It will probably start next month. (Read about their last buyback in 2004-05, and why I think it’s only something to pump the stock up)

The last time Reliance bought back shares was in 2004-05, when they bought just Rs. 150 cr. worth shares. The actual announcement was in December:

Max amount to be used: Rs. 2999 cr.

Max price to be paid: Rs. 570. (The share has gone through one bonus issue, so effective comparable price today is Rs. 285)

And look what happened:

In fact, if you look at the timing of the purchases, and the price, it’s quite interesting:

The buyback went on for just 20 days – after Jan 20, no further shares were bought. Even when the Reliance share price was below the Max price.

It would be fairly accurate to believe that the share buyback didn’t really intend to use the full cash announced, or to buy when the stock was below the target price; they didn’t buy even though the share was considerably below it, near the 500 levels, a few months later.

What it also means is: any announcement for a market buyback should be taken with a pinch of salt. (Much of the upmove you see was reflected in most Nifty stocks during the time; The Nifty went up more than 45% from the Jan 2005 lows) Thought I’d note this for those that are expecting fireworks in the announcement tomorrow.

Reliance Industries has said it will consider a share buyback in its Friday board meeting, and the stock went up 5% to 780. The theory is that Reliance will use its huge cash reserves – over 85,000 crore – to buy back about 10,000 to 12,000 cr. worth of stock. They will do this using a “market buyback”, where an investment banker will buy Reliance shares using Reliance’s money.

(For more information on what market buybacks are, read my article: Buying Back Our Deficit)

Moneylife finds that they have done a buyback announcement earlier, that didn’t quite meet their stated goals:

RIL has announced a buyback. It had announced a buyback on 28 December 2004. On that occasion the maximum buyback price announced was at Rs285 per share (that is, pre-bonus price of Rs570 per share). The maximum buyback price RIL announced was about 10.87% premium over the share price just before the buyback announcement.

The buyback program, seven years ago, was kept at Rs2,999 crore, which was about 10% of the share capital and free reserves of Reliance as on 31 March 2004.

However, throughout the period, Reliance bought back its shares only on nine days. And, the total buyback done by the company was a measly Rs149.62 crore. So, the actual buyback program was just 5% of the total buyback size of Rs2,999 crore.

(Emphasis mine)

This is not just Reliance, but in most market buyback announcements I have tracked in the last five years, companies have bought substantially lower quantities than they supposedly intended to. The idea of a share buyback was usually to keep the stock price up, but a few days after the announcement the shares would go back down. (Also see: Rajat Rajgarhia of Motilal Oswal thinks the aim is to “shore up sentiment in the stock”)

Another reason I’ve seen quoted for this announcement is that Reliance lost its position as the top weighted stock on the Index, and that Mukesh bhai is big on ranks. Not that this is substantiated, but it’s such an awesome gossip conspiracy story that I had to mention it!

It’s not usual, though, that a company of Reliance’s size – one of the largest in India – makes such “preliminary” announcements, but the company has been very careful to ensure that the stock doesn’t crater around bad results seasons. They have announced gas finds, deals, and agreements, nicely timed around results announcements, which is all above board (and it’s not just them, the big IT company we all know about has done it as well).

The stock, in the last couple years, has not done very well:

And in relative terms, the high for this stock is 1,650 in 2008; and it recently saw levels of 685.

Will this announcement take Reliance to the next level? Chances are: no. They have to show great results. Their Q2 numbers were not great, and their gas and crude finds are in decline; for serious growth they have to rapidly increase investment. While a buyback at this level for the company is good (lesser capital to service), there will be large capital requirements coming in as they explore and find gas, invest in shale assets, expand the broadband/BWA offering, enhance their retail setup or indeed, make their massive refining operation more efficient. These are real game changers, not the buyback.

If the quick rise from the bottom – nearly 20% now – is exciting, then the game is in short term trading, not in a “buy and hope for the Ambani magic”.

Reliance Industries (RIL) has sold its stake in media entity Eenadu to TV18, in a convoluted complicated deal quite characteristic of RIL and TV18. Let me help you decode.

First, the more recognized sources:

• Medianama's Low-Down
• DealCurry's analysis
• Times Of India
• Network18 and TV18 Press Release (Network18 is the parent of TV18)
• Reliance Industries Press Release

What is the deal?

1. RIL owns stake in Eenadu TV. 100% in regional news and entertainment channels, and 49% in telugu channels of ETV. This was purchased for 2600 cr.

2. RIL is selling part of this to TV18 - the full 100% of the regional news channels, but only half of their stake in the entertainment and Telugu channels. (TV18 will still get the right to buy the rest of Reliance stake, but we don't know at what price)

3. TV18 will pay Rs. 2100 cr. for this, according to their Press Release. Reliance, in it's press release, says the stake in the channels is "being profitably divested". We'll revisit this.

4. But TV18 doesn't have the money.

5. So they're going to fund the purchase through a mega rights issue of Rs. 2700 cr. "Rights" means existing shareholders get to buy in the proportion of their holding, not outsiders.

6. More than 50% of TV18 is owned by Network18 (the parent), which also doesn't have the money even to buy into the rights issue.

7. Therefore, even Network18 will announce a total fund raise of Rs. 2700 cr. Due to the cross holding, the total amount actually raised will be Rs. 4,000 cr.. Out of this, the promoters - read: Raghav Behl and the like - will put in Rs. 1700 cr.

8. But even the promoters won't put most of the money themselves - instead, they will get money from Reliance! They will borrow money from "Independent Trust" which is an RIL entity, and the borrowing will be "optionally convertible" to shares. We don't know more details, but this is quasi ownership, through optionally convertible debentures.

9. Infotel, that RIL investment in 4G and BWA, gets all the Eenadu and TV18 web and media content as a "preferred" partner to sell through its pipes. We don't know when, though.

Result

TV18 gets access to the Eenadu TV portfolio. Raghav Bahl retains control of TV18 and Network18, until Reliance decides to convert its ownership to equity.

Reliance gets official entry into media (till now the holdings weren't so well known), and gets to record a profit. Infotel gets content to sell through its pipe, when that happens.

TV18 and Network18 went up 20% each yesterday, and are up 7-10% today already. Reliance has gone up 2.5%.

Reliance pays itself and makes a profit?

Reliance is paying TV18 promoters who will buy into a TV18 rights issue which gives TV18 the money to buy from Reliance. That is what this deal is, and the beauty is in the books:

Reliance has sold part of its media investment, at what they say is a profit. That means they get to record a profit in the Jan qtr or whenever the deal is finalized. (And they funded that purchase, so they "bought" profits!) The funding part is a balance sheet item and changes nothing on the profit and loss statement.

Now Reliance bought for 2600 cr. and TV18 is buying for 2100 cr. - where is the profit? Reliance retains a part of their media holding in Eenadu, which I am sure will be valued at >500 cr. (some banker will certify it - who's to disagree?). That gives Reliance the profit - we don't know how much, though - that might only be visible next qtr.

RIL and Media companies?

A source - anonymous - writes about how, through a web of companies, Reliance has been building its own entry into the media space. The deal goes through Nimesh Kampani (who fronted the ownership, buying into Eenadu in 2008, and who is close enough to have mediated talks between the Ambani brothers) and then a slew of cross-held private companies.

Who's going to buy into the rights issue?

Apart from the promoters, that is. They haven't got the prospectus to SEBI yet, and I'm looking forward to the juicy details. We don't know the price (Network18 is less than Rs. 60 a share, and TV18 less than Rs. 40 - both are significantly higher than their pre-announcement prices).

We don't know who will buy - the share is likely to go up to "excite" people, and will be managed quite well by speculators.

Strangely, a good part of promoter stake is owned by "Senior Professional Welfare Trust"; This is the entity which borrows money, using Network18's holdings as collateral! Oh, such circular logic - these two companies deserve each other.

And wait, let's look at the market capitalization of these companies:

Network18 has 14.26 cr. shares. Even at today's price of Rs. 53, that's a market cap of 756 cr.

TV18 Broadcast has 36.21 cr. shares. At today's price of Rs. 38, that's a market cap of 1376 cr.

Both these companies are raising 2700 cr. each through rights issues. That is quite remarkable, and it'll be interesting to see who buys in. It'll take an awesome bull market to pull this off - and to get the FIIs and mutual funds to buy in as well. It'll depend on the pricing of the issue, and then the market price.

Is there a trade?

I'm not touching Network18 right now. (I can't stand the market manipulation in the stock - not blaming entities, but this share behaves as if it's rigged). But the trade in it will be to let the euphoria die and then short it.

As for Reliance, this won't impact them much.

Disclosure: no positions.

Now open to more questions and revelations. Thanks for reading.

After a reasonable performance by Infosys, Reliance has provided a decent set of numbers. Reliance has the highest weight of any stock in both the Sensex and the Nifty.

I’ll do this through a lot of charts. Not only is text less intuitive, the graphs provide a far better frame of reference.

Revenues and profits

Revenue’s come off the last quarter but is 37% growth, year on year. EPS has grown about 15%.

At the current price of Rs. 866, the stock quotes at a P/E of 13.

Revenue and profit growth have become subdued.

EPS growth which was quite spectacular earlier has moderated now.

(I know, this is looking at only the last 8 quarters, but this is when the momentum was strong – and before this the RPL merger had kicked in and that screws up comparisons)

Cash and Debt

Having sold 30% in a few exploration blocks to BP, they got a ton of cash (all of it has been realized, they say) and the situation looks good.

Operational Segments

There are 3 broad segments RIL is in : Oil and Gas Exploration and Production, Refining, and Petrochemicals. It does have other businesses – like the retail play, the venture into Broadband web access, and the insurance play, but these haven’t yet been fleshed out in the results.

(Profits are before interest and taxes)

Interestingly, the Oil and Gas division gets the least revenue of the three – it saw just 3563 cr in Q2 – but it forms a good chunk of the profits. Refining and Petrochem are great on volumes but low on margins.

Oil and Gas: Slowing Down?

I had to painstakingly gather the information about their Panna-Mukta, Tapti and KG D6 refineries and map them together. (Tech note: they gave information sometimes in “million barrels”, other times in “million tonnes”. For gas, it was either MMSCM or BCF. I manually converted. Yes, it was that kind of day.)

It seems like much of the oil and gas production is slowing. While their BP deal gives them a good potential in that BP will provide technology to perhaps increase output in KG-D6, or that they’ll find more oil elsewhere, the problem at Panna-Mukta and Tapti is that there is a natural decline.

Refining Margins Steady

The biggest segment of Reliance is the Refining one and they benefit from being able to process heavy sour crude like that of Saudi and Iran, which trades at a discount to the more easily refinable light-sweet. Refining margins per barrel of crude determine this segment’s profitability. The GRM movement is steady now:

At $10.1 per barrel the rate is reasonable but one would have expected more. Libya supply is short and that’s driven the price of light-sweet up a lot, so one would imagine the light-heavy difference would have widened. Apparently not too much.

This bit is disappointing. Since this is a very narrow margin business (EBIT is less than 5% of revenue) any small increase can make a big difference to the bottomline.

Petrochem: Not growing much

The production of petrochemicals hasn’t had a massive increase in the last two years, with the EBIT in this segment being just 10% higher in two years (2200 cr. in Sep 09 to 2422 cr. in Sep 11). This is despite nearly doubling revenue in this segment in the same time.

Realizations and costs here are heavily linked to commodity prices and crude, and the margins here seem

Outlook

I think the current price is a fair price for Reliance – in fact at a P/E of 13, it might actually be affordable, if it can grow EPS at 15%. The net debt is low (good) and they have been able to stay out of the corruption investigations (for now). However, commodity prices will continue to fall and inflation and increasing interest rates abroad will build a ceiling, and their flagging oil and gas divisions will need a period of lower revenues and consolidation before they can pick it up again.

Disclosure: While I’m not long the stock, I do have some open long call options that I bought primarily to benefit from results. And if you ask me the stock might not react too favourably from these results – since it is up over 13% in the last six days. (I’ll probably break even since I sold half my positions at a profit on Friday)

Oh yes, would love your comments.

“Libya is a producer of light, sweet crude,” says Andy Lipow, president of Lipow Oil Associates, a Houston consultant. “The spare capacity among Opec members is heavy, high-sulphur crude.”

Heavy, sour = higher density, higher sulphur content than "light, sweet". I doubt people are weighing or tasting the darn thing.

The spiel is that refinining heavy-sour is much more difficult, and there are a lot of refineries doing only light-sweet (in industry parlance, aren't "complex" enough). The article goes on to say that these refineries are in trouble, they have to find other light, sweet sources, blah blah.

But.

There are enough complex refineries processing heavy-sour, like Stuart Staniford says:

But it's an entirely different matter to claim that the entire global refining industry cannot make more use of Saudi crude right now, which is what these news stories are implying.  After all, if there's any refinery anywhere that could take more Saudi crude and refine it into gasoline, diesel, or some other useful product, then that refinery could substitute for the lost output from refiners of Libyan crude that cannot switch.  So there's no requirement for individual refineries to switch as long as someone, somewhere, anyone, anywhere can refine more Saudi crude at present.  If that were to be true, then global production of refined products need not fall, as long as at least 1.3mbd of additional Saudi oil can be refined to replace the 1.3mbd of Libyan crude exports that are soon not going to be showing up at oil terminals in Europe.

Among the biggest of the heavy-sour capable refiners is the Reliance Industries RPL plant in Jamnagar. If heavy-sour refining is going to be in demand, and the light-heavy crude price differences sustain, we should see RIL making a good run in the months ahead.

Also, the BP deal is a huge positive. $7.2 billion is usually good enough for a lot - and they already have another $7 billion (31,000 cr.) in the bank. This is a war chest, and they'll buy something with it, surely.

Disclosure: Long.

This post is written by Deepak Shenoy, at Capital Mind.

This is a good deal for RIL. It was getting flak for not being able to pump in more gas or explore more, and it really hasn't built deepwater capabilities yet. BP can also augment the near-term lack of gas by external supplies and feed into the distribution setup RIL has built which is currently not used much. It's huge for the gas industry in India if the distribution setup takes off - NG is an amazing fuel and if you fix transportation it can change our energy profile.

RIL went up 2% yesterday to 957. But nothing spectacular in terms of volumes, honestly. 555 crores on an expiry week is par for the course. Let's see how the markets react today.

This post is written by Deepak Shenoy, at Capital Mind.

The share eventually fell back to 70 in late 2008, and recovered to 130 levels when it was merged with RIL - 1 share of RIL for 16 of RPL, which translates to an RPL price of Rs. 112 (RIL is at 900, and had a 1:1 bonus after the merger). Sadly, at the time the merger price was effectively Rs. 60 per share of RPL or so, which is exactly equal to their IPO price in 2006.

But SEBI has now raised doubts about that November sale by RIL. Because of a futures deal:

RIL had sold 4.1 per cent equity in RPL in the open market in November 2007. However, to ensure the transaction did not hurt market sentiment, RIL first sold RPL in the futures and then the spot market while covering the shares sold in futures.

During the process, RIL generated revenues (sale consideration) of Rs 4,023 crore and its profit from the transaction in the futures segment was estimated at around Rs 500 crore.

Sebi had said that since the company was aware of the sale of equity and sold futures prior to that, it amounted to insider trading. However, the company has maintained that all rules and regulations have been complied with. RIL had also said that its action was driven by “protection” of market sentiment and that the gain was recorded in the company’s balance sheet.

...

Sebi’s stand was that if the sale in futures was to protect market sentiment and not to earn profit, the unintended gain should be deposited with Sebi as a settlement amount. RIL, however, is said to have offered a much lower amount. There have been offers and counter offers, but consent could not be reached.

Let's analyse this "insider trade".

What If RIL had lost money because of the large impact cost of its selling RPL shares? In the horrendously unethical world of Indian broking, any attempt to sell shares by RIL would have resulted in brokers front-running and shorting the stock or the future. (SEBI has taken little or no action in such cases, even when it is blatant, and even FIIs know it happens)

A large one time order would have absolutely destroyed the stock - 4,000 crore in one trade? Not happening.

If they split the trade into multiple days, then it would get reported as a bulk/block deal and the world would know and beat up the RPL share.

The futures trade was really the only way to protect the price. This is not rocket science. If I held a ton of shares of a company I want to exit, I'll use the "sell-future-first" policy. FIIs do this all the time. Domestic mutual funds make a few people rich while doing this. (Let's just say fund manager X wants to sell some stock. If someone, let's call him Mr. Broker, knows about the trade, a good amount of money can be made by shorting the future first. Enough said.)

But there are nuances. First, SEBI says there is "unintended gain". Perhaps they figured that out by seeing the actual impact cost of selling the shares versus the gain in the futures. RIL could have covered the futures at a much lower cost than they did - for instance, if they held on to the future short when the share sale was done announced, the market took the price down much further, and they benefited. So even if they allowed the futures transaction, SEBI could say there were extra profits from the announcement, so give that back.

Why is this illegal? Because RIL is an "insider" when it comes to RPL. In other stocks - where FIIs aren't "insiders" - stocks are sold and futures are shorted exactly like this, and profits are made, and perhaps even legally.

Technically SEBI has a case because insider information is any information that can materially impact the stock price. For instance if RIL had sold the stock when it knew, say, that a part of the refinery was going to fail, that would amount to insider trading - I think most people understand that. But if I'm an insider, and I'm selling some stock, does the knowledge that I'm selling the stock constitute insider information? The lines are murky.

This case is interesting from many perspectives, especially political. With MDA's powerful reach within the government, this case is still being allowed on - this could signal a stance I haven't seen associated with a government under the Congress in a very long time.

Disclosure: I sold RPL just around the same time RIL was selling it, coincidentally. I'm still long some RIL, both through direct ownership and mutual funds.

This post is written by Deepak Shenoy, at Capital Mind.

This is quite amazing really – six continuous down days, kissing the lower Bollinger band, way below moving averages, and MACD so negative it’s scary.

There’s a reasonable support at 975 and a one year low at 955 which should act as a secondary support. Right now it needs to bounce off those levels, and there’s talk in the markets of managers exiting because performance isn’t all that great.

I like the stock on a fundamental basis. The folks are huge on oil and energy – whose prices are going up. They have a lot of cash, which again is helping them acquire new technologies and to scale. They have invested in BWA and can be a huge game changer in the next five years. Recent results were very good – Rs. 14.8 EPS versus Rs. 11.55 last year, a 27% growth, in what is the largest company by market cap in India. Even if on a technical basis, this is weak, there’s honestly no long term difference in buying at 970 or 1100; if the projected growth of the company is as strong as I think there is substantially higher value in the stock.

Yet, there’s more to this because RIL is the biggest piece of both the Sensex and Nifty. When have we seen such a breakdown earlier? Take a look:

This is June 2008. Then what happened?

First, the stock recovered to hit the 20 day MA, and then flattened back for a while till Lehman said goodbye, when it went “crash” again.

The difference is that the last time around volumes peaked around the recovery time at nearly 2x average, and we need to see that happen before you time a recovery, even to retrace to 20 MA, currently around 5% above today’s levels.

Technical charts are useful indicators of sentiment and/or money-flow. In this case, when the market’s near a 2 year high, and RIL is the biggest stock in the indices, there can be no real lack of positive sentiment; it has got to be money flow. But – no bulk or block deals on the NSE in the last 15 days. Turnover averaged 500 cr. a day in the last few days. Delivery volumes were 60% averaged in the last few days – it’s about 48% on 11th, again, nothing substantial to note there.

And, strangely Reliance Puts have a lower implied volatility (the measure of time value) than calls. This is inverted – for a falling stock, it should be the other way around! People are selling Reliance puts at lower values relative to the calls, when the stock’s fallen

(Note to Dev questions: I wrote this tool that does option IV charting. It’s part of a software product I’m building.)

And the Reliance future still trades at a premium, and is continuing to do so – though it’s narrowed to 5 points.

While this may sound strange – the really strong stocks like Tata motors and ICICI Bank are trading at discounts in the futures market.

It’s altogether difficult to say which direction RIL will go, and because of it, the indices. I think what we should see is – a heavy down volume day, and then a recovery to 20 day moving averages. The support levels are important in that if the heavy volumes hold supports, we should see a rise. If it breaks 955, then we should quite easily see 915 on the stock. Odds wise I’d think of buying a call on the high volume down day, or buying the future at support. Selling calls or buying puts on a breakdown below 955 is the other strategy.

[Yes, that’s a long post to say “I don’t know”, but that’s how trading is – you react, you don’t predict, and you watch.]

Sorry for the highly technical posts. I can explain better using video – that’s what my new startup is about. But let me know if you have specific questions, or comments.

Disclosure: Hedged semi-longish position on RIL.

This post is written by Deepak Shenoy, at Capital Mind.

Treasury stock is when a company owns it’s own shares – not usually permitted, but in this case, Reliance got them when it merged with Reliance Petroleum I in 2002 (as opposed to RPL II in 2009). Investors remember that Reliance sold a good chunk of what it owned of the RPL II shares at 214 or so, a few weeks before the big crash in 2008. That shows they knew a little bit of timing. Of course, if the RIL management was that smart, they would have sold the treasury stock too at those rates – when RIL quoted at a bonus adjusted price of Rs. 1650.

It’s tough to read anything into treasury sales. If anything it’s good to have cash, one would think, especially when they have quite a lot of debt in a potentially rising-interest-rate scenario.

This post is written by Deepak Shenoy, at The Indian Investor's Blog.