Billionaire Mukesh Ambani-led Reliance Industries' cash reserves may rise to Rs 1,25,000 crore ($25 billion) by March 2012, putting the corporate giant in a comfortable position for investments in existing and new businesses, a report has said.
In an equity research note on Reliance Industries Ltd (RIL), global investment banking major UBS has said that the company's cash reserves were set for a major boost from the payment of remaining stake-sale proceeds from BP and its strong operational cash flow.
RIL's cash reserves stood at $14 billion in the second fiscal quarter, ended September 30, 2011.
Subsequently, RIL received a balance payment of $3.2 billion in October from BP for an stake sale in energy blocks.
After taking into account the capital expenditure of about $4 billion, RIL's cash reserves were expected to grow to $18 billion by March 31, 2012, largely due to payments from BP and operational cash flows, UBS said.
Additionally, RIL's treasury stock worth about $7 billion could further boost its cash reserves to $25 billion by the end of this fiscal, it added.
Addressing the shareholders at the company's Annual General Meeting in June this year, Chairman Mukesh Ambani had said that RIL would become debt-free on a net cash flow basis in the current fiscal.
RIL had outstanding debt of Rs 67,397 crore ($15.1 billion) as of March 31, 2011, as against Rs 62,495 crore ($13.9 billion) a year ago.
At the same time, RIL had cash and cash-equivalents of Rs 42,393 crore ($9.5 billion) as on March 31 this year, which was nearly double the level seen a year ago.
Since then, its cash level has grown substantially, largely due to the stake-sale proceeds from global giant BP. RIL completed sale of 30% stake in its 21 oil and gas blocks to BP in August for over $7 billion.
There have been a lot of speculations in the market in recent months about how RIL would utilise its huge cash pile and concerns have been raised in some quarters about the limited clarity on the same.
UBS said that RIL's net-cash balance was a matter of comfort, "contrary to the market's concern, particularly in the current tight liquidity environment."
A lack of visibility on RIL's cash strategy and potential return on investments in non-core businesses like retail, telecom, insurance, hotels, and SEZs has been a dampener on its stock performance and investor sentiment, it said.
However, an efficient use of cash in growing RIL's core energy assets, new businesses and a potential buy-back of shares would be a positive for the stock, UBS said.
UBS said that any visibility on value creation from its investments and developments like retail turning profitable, a tie-up with a global retailer, the government allowing foreign direct investment in retail, and RIL monetising its SEZ land assets could act as positive catalysts.
UBS said that it believed "some township development in partnership with Infrastructure Leasing & Financial Services is underway" with regard to SEZ land assets.
"Further, we believe efficient cash deployment in future ventures including: upstream assets, such as gas blocks, and the LNG chain; new-generation high growth businesses, partnering with technology leaders (such as BP), and a potential buy-back will be positive catalyst," it said.
UBS also counted inorganic growth of global refining and petrochemical capacity at attractive valuations as potential catalysts, but cautioned that it was unlikely to create significant value as it could make the business more cyclical.
At the same time, the report said that the stock could be affected adversely in the event of any potential regulatory penalties, any severe downcycle for the company's refining and petrochemicals businesses amidst a global recession.
The risks could also arise from any inefficient use of cash for non-strategic large investments and losses mounting from previous non-core investments, it added.
There have been lots of speculations about RIL's plans for new segments like broadband and financial services.
For broadband venture, it recently acquired stake in an online education company for an undisclosed amount, while there have been reports about RIL leasing infrastructure from other telecom players.
In financial services space, RIL has formed a joint venture with DE Shaw and has announced buyout of Bharti group's stake in the latter's insurance ventures with AXA.
RIL's market value currently stands at about $60 billion (Rs 2,90,000 crore). Its revenues were in excess of Rs 2,65,000 crore and profits of over Rs 20,000 crore in the FY11.