RIL Q4 results: Time to return cash to shareholders

Dhirubhai Ambani, the founder of Reliance Industries, often made shareholders happy by making surprise bonus share announcements. He always felt the need to thank his shareholders for helping him. Mukesh Ambani, his eldest son and chairman of Reliance Industries, will now have to do something similar today.

If analyst expectations are anything to go by, Reliance Industries, the private sector energy-to-retail conglomerate, is facing pressure to grow profits in the two flagship businesses, refining and petrochemicals. However, the company does not need the surging cash pile for any capital investment. The company has launched a buyback offer that helps promoters consolidate control. However, shareholders may want much more.

With Rs 80,000 crore cash on the balance sheet, the company can consider announcing a handsome cash dividend that nobody expects. 

Here are some pointers ahead of the announcement expected today after trading hours:

• Profit growth: Top-ranked analysts from StarMine, a research aggregator, are much more pessimistic about Reliance's upcoming earnings, forecasting a fiscal fourth quarter net profit of Rs 4,258 crore, nearly 7 percent below the wider consensus forecasts. Operating profits are seen at Rs 6,897 crore, 2.7 percent below consensus estimates, according to StarMine's SmartEstimates.

• Refining business: A key metric for Reliance Industries is the gross refining margin (GRM). The GRM is the difference between the price of petroleum products and crude oil. The refining business accounts for two-thirds of the company’s net sales and 40 per cent of the company’s profit before interest and tax (PBIT). Analyst at Motilal Oswal Securities expects GRM for March 2012 quarter to hover around $ 6.4 per barrel. The company reported a GRM of $ 6.8 per barrel in December 2011 quarter and much lower than $ 9.2 per barrel announced in March 2011. 

• Petrochemical business: Petrochemicals is the second biggest business accounting for 27 percent of the net sales and 34.4 per cent of the profit before interest and tax. The profitability of the petrochemical business is expected to fall further in March 2012 quarter. Motilal Oswal puts the profit before interest and taxation or PBIT of petrochemical business at Rs 1,980 crore for the quarter to March 2012 against Rs 2,630 crore in the year ago period.

• Cash pile: Reliance already has Rs 80,000 crore cash. Analysts say that the company could earn Rs 71,000 crore over the next three years as operating free cash flow. Operating free cash flow is the difference between the operating profit and capital expenditure that the company incurs. The company has announced no significant plans to deploy the cash it has or it would generate over the next two years. On Friday, yet again, the company's plan ahead on utilising this cash pile would be watched closely.  

• High dividend could justify Sensex leadership: On Friday, Reliance Industries should either announce convincing plans for utilizing the cash pile or simply return the money to shareholders. On Wednesday, Reliance Industries became the most valuable company in the BSE Sensex. It has to justify this status. Investors would be happy to receive a solid cash dividend. Analysts are not too impressed with Reliance’s foray into non-core businesses. “We note that RIL’s investments in non-core businesses like Special economic zones or SEZs and retailing have not created meaningful value for shareholders,” says Kotak Securities, a Mumbai-based firm in a note earlier this month. “The SEZ business probably lost money before its termination and retailing continues to lose money,” the note adds. The brokerage is not optimistic about the telecom foray, given high license fees and a competitive business environment. “Small investments in hotels and media show lack of focus, especially given limited progress in core businesses,” the note adds.

(With inputs from Reuters)