Standard Chartered Bank, in an October report, said investors have typically rewarded RIL dur- ing its investment phase, “given its track record of identifying large value-accretive projects and then executing it to near perfection“.
The size of RIL's free cash flow, however, has grown too large for investing in available organic opportunities, analysts Rahul Singh, Avishek Datta and Saurav Anand had wrote.
Free cash flow is operating cash flow minus capital expen- diture and dividends, or essen- tially the extra money a compa- ny can set aside for investments or expansions.
The StanChart analysts expect RIL's operating cash flow till fis- cal year 2013 to be $24 billion (`1.06 trillion), but estimate capital expenditure at $17 bil- lion for recent projects such as shale gas and broadband wire- less, as well as for ongoing de- velopment and exploration costs and maintenance expenditure. That would leave RIL with a free cash flow of around $7 bil- lion by fiscal 2013.
RIL's stock has been trailing the benchmark Sensex for some- time now. Through fiscal years 2009 and 2010, its shares gained 41.10%, while the Sensex rose 80.54%. This year, RIL shares gained 13.66%, and the Sensex, 29.05%.
RIL, a constituent of the 30- stock Sensex, has a 12.15% weight in it. On Tuesday, RIL shares ended nearly flat at `1,107.45, as did the Sensex at 20,932.48 points.
Historically, RIL's stock has done well while in an invest- ment cycle, and has been sub- dued during periods of high free cash flow arising out of the in- vestments.
During peak investment cy- cles such as in 2003 and 2004, when it invested in its telecom business, and between 2006 and 2008, when work on its refinery in Jamanagar and on its oil and gas block KG-D6 were in prog- ress, RIL's shares outperformed the broader market.
Between 2006 and 2008, for instance, RIL's shares rose al- most 30% on the Bombay Stock Exchange (BSE), while the Sensex gained just 1.29%.
But periods of high cash flow such as between 2001 and 2002 and between 2004 and 2005 saw the stock underperform.
Some analysts, however, said RIL's free cash flow may not be as high as is estimated.
“It is not possible to take a call on what RIL's free cash flow would be couple of years down the line. It has announced some mega investment plans and might announce new ones that would need more money,“ said S.P. Tulsian, an independent stock market analyst in Mumbai.
The StanChart report recognizes that more oil and gas dis- coveries could start a new capex cycle, but says any significant exploration and production capex in the next two-three years is unlikely given the long gestation in getting approvals and the formulation of a devel- opment plan.
Experts said that while RIL's investment in its recently ac- quired shale gas assets in the US would be significant over the next 10 years, the assets would become self-funding quickly. Also, there was limited visibility at the moment on other projects RIL has announced such as broadband wireless and power.
Niraj Mansingka, oil and gas sector analyst with Edelweiss Securities Ltd, said the capex RIL announced for some of its new projects is in the initial phase and would gather mo- mentum and yield returns over the next two-three years.
Cyclical changes in the oil and gas sector have also influenced RIL's stock movement.
“While the performance in 2006-08 was definitely helped by the extraordinary strength in the refining cycle and the innovative listing of Reliance Petroleum Ltd, we believe that only partly explains the outperformance,“ Standard Chartered said.
Mansingka said the cyclical nature of the oil and gas sector has become a more important determinant of how RIL's share prices move rather than project- based capex.
“The profitability from a proj- ect compared to the capex in- curred on it is not as high as be- fore since RIL has become a very large company now. So investors are looking at the cycles of the exploration and production business for an indication,“ Mansingka said.
Analysts expect refining mar- gins to remain subdued over the next two fiscal years, given the capacity expansions planned by Asian refiners and a modest de- mand recovery in developed markets.
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