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Reliance and RPL aren't quite overvalued

I hear a lot nowadays about how Reliance, the biggest loser on the Index, has been overvalued, had doubled for no reason etc. etc. I would like to present my view on this topic.

Reliance Industries is growing at 30-40% on EPS.
It’s being given a forward P/E of 25. This is not considering that
it’s sitting on a pile of cash, and is also growing inorganically, and
has an unvalued reliance retail, a majority stake in RPL and RPL is
worth 78000 cr. , building huge coke gasification and paraxylene
plants of the size no one else has in the world, and of course it has
all the gas finds, the SEZs and all that. Throw out all of that stuff,
and we still have a growth rate of 30-40% this quarter, and forward
P/E is 25.

This is one of India’s largest companies by turnover. They make more
revenues than Infy, TCS, Wipro, and Satyam ADDED UP, quarterly. And
they have recently grown faster on profits than all of these companies.

Take this quarter. They have a P/E of 26, which is consolidated with
IPCL. This is not including an unrecorded forex gain of Rs. 515 cr.
(which other companies like Tata Steel and Airtel are recording) which
is about Rs. 4 per diluted share. Let’s just take Rs. 2 of that for this quarter. That’s a total of Rs. 28 earnings per share. If you take Q2 last year and consolidate with IPCL, you get an EPS of 19 for RIL and 2.5 for IPCL (12.4 is IPCL’s EPS, but divide by 5 since the merger was 5:1) That’s 21.5 last year. About 33% growth
on EPS. Going forward they are close to an EPS of about Rs. 100 on the
year. The price is 2,500. P/E? 25.

They call that expensive? Note that we are paying Infy a P/E of 25
forward, on a growth rate of 20% and even their one year guidance is
only 20% growth. They are EXPECTED to earn Rs. 79.9 (the highest end
of their guidance) per share. Last year they did Rs. 67 or so. The
growth rate? Less than 20%. At current price of Rs. 1900, that’s a P/E
of 23.

I have heard a lot of things about Reliance and the promoters. But
they have created more shareholder wealth in the last five years (and
earlier too but ditch that for now) than most other companies. In fact
if you had bought one share of Reliance pre-brother-split in 2005, you
would have paid Rs. 800 or so, and got one share of Reliance, one
RNRL, one RCOM, and some parts of REL and Reliance Capital. The net
value of these shares today is around Rs. 4,000, a five fold increase
in less than three years.

And this is India’s most valuable company, by market cap. The biggest
company in India grows your money 5 fold in 3 years. Very few in the
top 10 can claim to do so – closest perhaps is Airtel, and that’s
valued at, let’s see, a p/e of 40+.

Yes, today people say RIL it’s “overvalued”. But have they considered
that all this time, it has just been undervalued severely? They gave it
a P/E of 15 when it grew at twice that rate. Today it’s doubled and
the P/E is still lower than its forward growth rate. And it’s
expensive because it’s doubled in value?

I know that Reliance will participate just as much in a crash as
anyone else. Yet, they are the guys you want to buy, because from
here downwards, they are more valuable than most other large caps.

Let’s also look a little bit at RPL, Reliance Petroleum Limited. People say it’s WILDLY overvalued for a company that hasn’t even started production yet.

It’s coming up on schedule in Dec 2008. (Reliance has have said it’s earlier than
schedule, but ditch that, let’s say it comes on schedule). It will
process 580,000 barrels per day of heavy crude. Reliance Industries
does about the same ammount, actually RIL does about 40,000 barrels a
day less than RPL. But let’s assume similar margins for the RPL
businesses and work it out. The half yearly (net) profit of reliance
on the refining segment as of Q2, 2008 was about 3859 cr. as gleaned
from the quarterly report. Multiply that by 2 to get annual figures you
get about 7700 cr.

Now if RPL can do exactly that, it earns an EPS of about Rs. 17.1 per share.

Now if we add the 0.9 million ton polypropylene plant in RPL, with
current margins, the EPS may square off at around Rs. 20 per share.

The current value of RPL is around 170, which is pretty reasonable for
what is effectively one of the world’s largest refineries. Perhaps a
little higher can be given for higher margins (with a stabilised
dollar, margins will be higher than now) and the fact that the
project is a little ahead of schedule. So it’s not “over” valued, it’s
perhaps got to a reasonable valuation as of current market pricing. It will
get re-rated as refinery margins change and heavy-light crude
differential (currently $5) changes.

Hope that helps. Value is obviously a very difficult thing, but I
present my simplistic view. Please feel free to correct me if I’m
wrong.

Disclosure: I am long RIL and RPL.

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