RIL valuation: Analysts just can't get it:
The valuation of Reliance Industries by equity analysts could well be a case of the ends justifying the means. Most brokerage firms have valued the stock between Rs 1,600 and Rs 1,750. The range may not seem very wide considering the volatility of earnings in some of the businesses that RIL is seeking to increase its presence.
But what is surprising is that the values assigned to the individual businesses by these analysts show a huge variation. Typically, the valuation of a company with diversified interests is based on the sum of the parts. ETIG compared a number of valuation reports from some well-known research houses, and these reveal some interesting numbers.
Consider for instance, the upstream business of Reliance, which is largely the KG basin oil & gas discoveries along with a number of smaller reserves. This has been valued between Rs 300 and Rs 720 per share of RIL, depending upon which report you choose to believe.
There are differences elsewhere too – the value of RIL's retail foray has been pegged at a low of Rs 61 to a high of Rs 155. These two numbers imply that RIL's retail venture could be worth between Rs 8,500 crore and Rs 21,600 crore. To put that in perspective, the two large listed retail companies in India – Pantaloons and Shopper's Stop — have a combined market capitalisation of about Rs 7,700 crore, well below the lower end of the band.
Assigning a value to the stock is no mean feat, when you look at the number of businesses, though not all of them are related, that the company is into. Petrochemicals and refining is the bread and butter of the group. Then there is oil and gas exploration, recently commenced retail operation, shares in group companies and the proposed special economic zone venture. Finally, the company also owns a significant chunk of its own shares, referred to as 'treasury stock', formed at the time of the merger of Reliance Petroleum with itself.
Not all research houses have valued all the parts. Some have left out the smaller E&P assets ,while others did not subtract the debt. Some have left out the treasury stock, which accounts for about 12% of the company's shares.
The wide variation in the values of the individual business, but the relatively narrow difference in the final value has given rise to talk that analysts decide the target price and then assign relevant values to the various parts so that they add up to the whole. An analyst working with a leading research house says that the practice is common in some quarters. "Our job is to take the limited information available and then use that to take a view on a company," he adds, on condition of anonymity.
The big question then seems that why do analysts have to resort to such measures? One reason seems to be the low level of information available on the company. In case of upstream businesses, this could be because the regulator doesn't allow disclosures on discovery volumes till they are duly certified. However, that is not the case always as in the case of Reliance Retail. However, the official communication from the company is silent on facets such as investment figures, near-term plans or even revenues from this business. The total investment that has gone into retail so far is reportedly over Rs 4,000 crore.
But what is surprising is that the values assigned to the individual businesses by these analysts show a huge variation. Typically, the valuation of a company with diversified interests is based on the sum of the parts. ETIG compared a number of valuation reports from some well-known research houses, and these reveal some interesting numbers.
Consider for instance, the upstream business of Reliance, which is largely the KG basin oil & gas discoveries along with a number of smaller reserves. This has been valued between Rs 300 and Rs 720 per share of RIL, depending upon which report you choose to believe.
There are differences elsewhere too – the value of RIL's retail foray has been pegged at a low of Rs 61 to a high of Rs 155. These two numbers imply that RIL's retail venture could be worth between Rs 8,500 crore and Rs 21,600 crore. To put that in perspective, the two large listed retail companies in India – Pantaloons and Shopper's Stop — have a combined market capitalisation of about Rs 7,700 crore, well below the lower end of the band.
Assigning a value to the stock is no mean feat, when you look at the number of businesses, though not all of them are related, that the company is into. Petrochemicals and refining is the bread and butter of the group. Then there is oil and gas exploration, recently commenced retail operation, shares in group companies and the proposed special economic zone venture. Finally, the company also owns a significant chunk of its own shares, referred to as 'treasury stock', formed at the time of the merger of Reliance Petroleum with itself.
Not all research houses have valued all the parts. Some have left out the smaller E&P assets ,while others did not subtract the debt. Some have left out the treasury stock, which accounts for about 12% of the company's shares.
The wide variation in the values of the individual business, but the relatively narrow difference in the final value has given rise to talk that analysts decide the target price and then assign relevant values to the various parts so that they add up to the whole. An analyst working with a leading research house says that the practice is common in some quarters. "Our job is to take the limited information available and then use that to take a view on a company," he adds, on condition of anonymity.
The big question then seems that why do analysts have to resort to such measures? One reason seems to be the low level of information available on the company. In case of upstream businesses, this could be because the regulator doesn't allow disclosures on discovery volumes till they are duly certified. However, that is not the case always as in the case of Reliance Retail. However, the official communication from the company is silent on facets such as investment figures, near-term plans or even revenues from this business. The total investment that has gone into retail so far is reportedly over Rs 4,000 crore.
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