This is a guest post by VINEETH SUKRITHAN
The stark contrast between RIL’s latest march quarter performance and the almost- three-year highs that its stock price is perched on top, merits a deeper analysis. On April 18th, 2014, RIL released its quarterly data showing disappointing results that were entirely in line with industry expectations. Petrochemical business revenues fell 3.7%, while oil and gas turnover dropped 18.2% q-o-q. Net profit growth in its January-March quarter (Q4FY14) was at Rs 5,631 crore – only 0.7 per cent higher than Rs 5,589 crore it earned a year ago. The petrochemicals business’s Ebit was lower than in the December quarter and the company’s outstanding debt over shot its cash and equivalents. (Rs 89,968 crore against cash, and equivalents of Rs 88,190 crore.)
Yet, for a company that has always been known to be reticent about taking on high levels of debt, RIL has gone on what can only be called a remarkable splurge in capital expenditure. Its capital expenditure during the year was the highest ever. The company reported net addition to fixed assets of Rs 35,210 crore in FY14. In FY09, when the company commissioned its second refinery and K-G basin gas production, its capex was only Rs 24,907 crore. So, on all accounts, RIL’s actions and stock price seem counter to the predicaments of its current financial health, which begs the question, where does Reliance derive this level of confidence in its future profitability to be willing to take on tremendous amounts of debt?