Thursday, October 22, 2009

Reliance Industries’ retail arms in the red, reflecting challenges

By: Satish John

Mumbai: Just how big is the retail business of Reliance Industries Ltd, or RIL?

The answer, according to the company’s annual report for 2008-09: well over half the size of Pantaloon Retail India Ltd, India’s largest listed retailer that set up its first Big Bazaar store in 2001.

Reliance’s first store opened for business in late 2006. Still, Reliance’s retail subsidiaries remain unprofitable, an indication of the challenges facing India’s modern retailers.

The firm’s annual report, released on Wednesday, shows that RIL’s retail businesses ended the year with an aggregate loss of Rs557 crore on a revenue of about Rs4,000 crore. Pantaloon Retail reported a net profit of Rs140.58 crore on net sales of Rs6,341.7 crore in 2008-09.

Among RIL’s retail subsidiaries, Reliance Retail Ltd (RRL) reported a loss of Rs20.24 crore on a revenue of Rs622.31 crore; grocery chain Reliance Fresh Ltd reported a net loss of Rs249.30 crore on revenue of Rs1,778.06 crore; and Reliance Hypermart Ltd reported a loss of Rs51.84 crore on a revenue of Rs372.32 crore. Reliance Dairy Foods Ltd and Reliance Digital Retail Finance Ltd too reported losses.

“The (losses) are small change for a company of RIL’s size,” said an analyst who tracks the company at a Mumbai brokerage and who did not want to be identified. The firm is now scaling up its retail operations.

“Through this year, RRL increased its footprint to more than 900 stores in 80 cities across 14 states in India,” RIL said in its annual report. “Keeping in sync with its multi-format store strategy, RRL added new formats to its spectrum in the last year,” the company said in its annual report.

Several operational metrics in the consolidated annual report for 2008-09 have doubled after the Bombay and Gujarat high courts approved the merger of Reliance Petroleum Ltd with RIL. Its net fixed assets have doubled to Rs1.69 trillion from Rs84,889 crore in 2007-08. Its total assets have surged to Rs2.45 trillion from Rs1.49 trillion and its net worth has increased 55.15% to Rs1.26 trillion. The number of employees in the firm’s roster, however, slipped to 24,679 from 25,487 in 2007-08. Its contribution to the national exchequer also fell to Rs11,574 crore from Rs13,696 crore, although not all of it could be ascribed to tax planning as depreciation rose to Rs5,195 crore from Rs4,847 crore a year earlier.

RIL’s appetite for cash was evident from the fact that it divested its entire mutual fund portfolio of Rs3,058.73 crore even as it received a cash infusion from the balance subscription of Rs15,142 crore.

RIL’s cash and cash equivalents at the year-end stood at Rs25,050 crore, placed in instruments such as fixed deposits or government securities. “The management anticipated the liquidity crisis,” said a spokesman for the company.

RIL’s net gearing was still at a stable 27.8%, even as a bulk of its capital expenditure budgets are in place, said the analyst mentioned earlier. He added that RIL has to de-bottleneck its refinery capacities a bit, which will not entail much funds. The analyst also said RIL is at its peak in terms of the debt burden as its investments in the new refinery at Jamnagar, Gujarat, and in the Krishna-Godavari basin will start paying off from now.

There were some interesting transactions with related entities such as Reliance Gas Transportation Infrastructure Ltd, a company promoted by RIL’s promoters, which is setting up intra-city and inter-city gas pipelines.

RIL invested in 500 million non-cumulative preference shares of Reliance Gas for Rs2,000 crore. As per regulatory norms, RIL cannot invest in the equity of the gas transportation company. RIL had also bought 85,000 shares in the National Stock Exchange for Rs28.48 crore during the year.

The firm decided to levy “manpower deputation charges” of Rs20.81 crore on RRL for 2008-09, against zero in 2007-08. Reliance Trends was levied Rs12 crore under the same overhead, and Reliance Petroinvestments Limited was charged Rs2.75 crore.

The media in recent times has speculated about RIL readying for a major acquisition after a portion of its treasury shares, held by wholly owned subsidiary Petroleum Trust Ltd, was sold in the current fiscal. RIL in 2008-09 invested Rs314.53 crore in Delta Hydrocarbons SA Luxembourg. Gulf Africa Petroleum Corporation, which the firm acquired in 2007, is yet to make a turnaround.

“Significant reductions were achieved in supply chain cost and the operations were integrated into the RIL system,” the report said.

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