Corporate Governance

Board of Directors
Reliance Infra-(All fig.in crores)
1.
2.
3.
4.
5.
6.

Anil Ambani- He is the chairman of Reliance group

Shri Satish Seth- He is the chairman of Reliance subsidiary
SS Kohli MD of Punjab & Sindh Bank
RR Rai-He is currently on the board of NMMIMS
VK Chaturvedi-MD of NPCIL
Shri Ravikumar-Independent Director, Ex-chairman of BHEL
Size of Board
Employee Representative on Board
Non-Exec Director on Board
Independent Directors
Former CEO on Board
Independent Chairman
Board Meetings
%Attendance

6 (Unitary Board System)

0
6
3
1
0
5
96%

1. No of Directors having no relation to Reliance is 4 indicates that the board is not biased
towards management decisions and might take decisions in the favour of shareholders
2. Though there is no independent chairman and the presiding chairman is Anil Ambani. His
stature might convince the board of directors in taking decisions which are not in the favour
of shareholders.
3. The Shareholder base was 12,29,227 as of March 31, 2014 and 12,97,076 as of March 31,
2013. Though the shareholder base is decreasing but the amount is quite substantial to have
a say in decision
Marginal Investor
Reliance Infra (Shareholding Pattern)
Institutions
Mutual Funds / UTI
Financial Institutions / Banks
Central Government / State Government(s)
Insurance Companies
Foreign Institutional Investors
Non Institutions
Individual
Public Holding
FIIS are the marginal Investor

%
0.52
0.46
0.05
16.95
19.87
12.44
50.29

Analysis
Company Name
Reliance Infra

Regression Beta
2.12

R2
0.7042

Standard Error
0.1577

Jensons Alpha
109%

Reliance Returns
100.00%
80.00%
y = 2.1211x - 0.0105
R = 0.7042

60.00%
40.00%
20.00%

-30.00%

0.00%
-10.00%
0.00%
-20.00%

-20.00%

10.00%

20.00%

30.00%

40.00%

-40.00%
-60.00%

1. Reliance Infra is earning very high returns and is performing better than expected
2. Market Risk of Company is 70% and company specific is 30%
Bottom up Beta
Reliance Infra
Sector
Power
EPC
Infrastructure
Total

Company
Revenue Sector Unlevered Beta
Unlevered Beta
1.10
13652
1.04
4710
1.24
670
1.24
19032

WACC
Gross Debt
Average Maturity
Average Annual Interest Cost
Average Annual Interest Expense
MV of Debt
Equity Share Capital
Face Value
No of Outstanding Shares
Current Share Price
Total Equity

14842
3.4
10.88%
1614.8096
16058.63
263
10
26.3
647
17016.1

Levered
Beta
1.78

Operating Lease Commitments

Year1
Year2
Year3
Year4
Year5
Present Value

Company Curre
ncy

Risk
Free
Rate

Reliance
Infra

6.57
%

INR

Mature
Market
Risk
Premiu
m
5.50%

4.5
0.125
0.125
0.125
0.125

Parameters
Country Lambda
Risk
Premiu
m
3.30%

79.33%

PV
4.165509581
0.10710784
0.099146385
0.091776715
0.084954841
4.55

Ratin Sprea
g
d

DebtEquity

Cost of
Equity

After taxCost of
Debt

WACC

A+

0.94

18.97%

5.30%

12.33%

1.46%

Optimal Debt Ratio

Reliance Infra
Debt Ratio
0%
10%
20%
30%
40%
50%
60%
70%
80%

Beta
Cost of Equity
Cost of Debt
1.10
15.21%
1.18
15.65%
1.28
16.20%
1.41
16.91%
1.58
17.86%
1.82
19.19%
2.18
21.18%
2.79
24.50%
3.99
31.13%

Optimal Debt Ratio at which cost of capital is minimum-70%

Cost of Capital
0.00%
4.47%
5.00%
5.16%
5.66%
5.99%
6.48%
7.14%
7.64%

15.2%
14.5%
14.0%
13.4%
13.0%
12.6%
12.4%
12.3%
12.3%

Debtequity
0.00%
11.11%
25.00%
42.86%
66.67%
100.00%
150.00%
233.33%
400.00%

Debt Ratio
Debt Ratio

Levered Firm
Value

0.00%

26,991.85

10.00%

27,537.94

20.00%

28,059.17

30.00%

28,525.75

40.00%

28,741.58

50.00%

28,983.92

60.00%

29,136.39

70.00%

28,737.52

80.00%

28,588.16

90.00%

29,085.98

Debt Ratio at which Firm value is maximum is 60%

Present Debt Ratio-50%

Designing the perfect Debt

1. As the projects have a long-gestation period and quite capital intensive therefore it demands
long-term money
2. Interest rate exposure should be minimized
3. Debt could be in form of convertible debentures as the risk exposure is big in long projects
4. Debt could be taken from bond-market as mature bond markets do provide long-term
money with constant rates minimizing the exposure of company to fluctuating interest rates
5. Company can explore external commercial borrowings as the interest rate is less but need to
hedge as a guard against currency-exchange fluctuations
6. Infrastructure Investment trusts can be explored for taking debts
Return on Capital & Economic Value Added

(Million Rupees)
EBIT
Tax%
EBIT(1-T)
Debt
Equity
Cash
Book Value of
Capital
ROC

CY 2008
CY 2009 CY 2010 CY 2011 CY 2012 CY 2013 CY 2014
16762.5 18569.3 21938.3 23101.8 32897.8 40358.4 38779.6
8%
5%
9%
8%
25%
8%
13%
15502.350 17552.8
21356.3 24518.6 37028.2 33930.4
5
6 19968.9
5
7
9
7
101053.
116744.
219761. 242890.
59036.2
5 85838.8
2 182897
8
9
207040. 236076. 242442. 261210. 271434.
163587.1 168976
6
1
1
1
4
1063.5
3768.2
4127.5
4053.7
48.3
421.3
6114.8
266261. 288751. 348766. 425290. 480550. 508210.
221559.8
3
9
6
8
6
5
7.00%
6.59%
6.92%
6.12%
5.77%
7.71%
6.68%

Returns on Debt

26.26%

17.37%

23.26%

18.29%

13.41%

16.85%

13.97%

Economic value
added
28729.2
1. Return on capital is less than the Cost of Capital indicating the company is not taking good
projects
2. Even though they are able to repay their debts as they are not paying enough returns to
shareholders. Those returns are diverted for paying debts and maintaining profits
3. Economic Value added is negative indicating the company is not performing goods when it
come to projects and company
4. The company need to take good projects for improving the value addition to company
5. The company is surviving because of name of reliance
Dividend Policy
(Million Rupees)
Net Income
Dividend per Share
Dividends
Dividend Payout Ratio
Price Per share
Dividend Yield

CY 2008
11782.1
6.3
1656.9
14.06%
590
1.07%

CY 2009

CY 2010

CY 2011

CY 2012

CY 2013

CY 2014

13532.3
7
1841
13.60%
1157
0.61%

15193.9
7.1
1867.3
12.29%
814
0.87%

15516.1
7.2
1893.6
12.20%
348
2.07%

15868.1
7.3
1919.9
12.10%
519
1.41%

22468.3
7.4
1946.2
8.66%
429
1.72%

19136.7
7.5
1972.5
10.31%
588
1.28%

Dividend Yield
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
CY 2008

CY 2009

CY 2010

CY 2011

CY 2012

CY 2013

CY 2014

1. Dividend Payout Ratio is on average constant level and is quite less because the company is
in growing stage and is exploiting the opportunities in infrastructure field for investment
2. Dividend yield is changing though the amount of dividends are on average at a constant level

3. Dividend yield is minimum in 2009 because of famous Recession due to which the economic
condition of market crashed affecting the share prices of Reliance infra too
4. It shoots up in 2011 because of various policies and investments announced in power sector
mainly of UMPP ,PPP in power plants and other sectors due to which positive sentiments in
the market shots its dividend yield
5. However it came down majorly last year because of various issues that power and
infrastructure sector faced like coal block scams, various permits and clearances issues,
negative sentiments in investment market regarding infrastructure sector hence building
negative image in markets.
FCFE
Debt Ratio
Net Income
Capex
Depreciation
Working Capital change
New Debt Issued

48.56%
1913.67
3635.4
534.8
1582.17
2623.77

FCFE
Dividends Paid

2263.504
19.72
0.87%

1. The amount of dividends paid are quite less just 0.87% of FCFE
2. The projects that company is taking are not good as EVA is ve and ROC is less than cost of
capital
3. After analysing all these facts Ill not believe on the policies of govt.

Valuation
Reliance Infra

Inputs
Normalized EBIT (before adjustments)

INR 3,878.00

Adjusted EBIT =

INR 3,578.79

Adjusted Interest Expense =

INR 1,696.38

Adjusted Capital Spending

INR 3,772.70

Adjusted Depreciation & Amort'n =

INR 851.25

Tax Rate on Income =

12.00%

Marginal tax rate =

35.00%

Current Revenues =

INR 19,033.60

Current Non-cash Working Capital =

-INR 1,001.87

Chg. Working Capital =

INR 1,582.17

Adjusted Book Value of Debt =

INR 21,980.71

Adjusted Book Value of Equity =

INR 27,491.25

Invested Capital

INR 49,429.84

Length of High Growth Period =

10

Growth Rate =

2.46%

Debt Ratio

48.55%

Beta used for stock =

1.78

Lambda used for stock =

0.79

Riskfree rate =

6.57%

Mature Market Equity Premium =

5.50%

Country Risk Premium =

3.30%

Cost of Debt =

8.30%

Tax Rate for computing income=

12.00%

Marginal tax rate =

35.00%

Return on Capital =

6.16%

Reinvestment Rate =

40.00%

Current

2.46%

2.46%

2.46%

2.46%

2.46%

Cumulated Growth

102.46%

104.99%

107.57%

110.22%

112.94%

Reinvestment Rate

40.00%

40.00%

40.00%

40.00%

40.00%

Expected Growth Rate

EBIT * (1 - tax rate)

- (CapExDepreciation)

INR 3,044.48

INR 3,119.49

INR 3,196.34

INR 3,275.09

INR 3,355.78

INR 3,438.45

INR 2,921.45

INR 1,247.79

INR 1,278.54

INR 1,310.04

INR 1,342.31

INR 1,375.38

-Chg. Working Capital

INR 1,582.17
-INR
1,459.14

INR 0.00

INR 0.00

INR 0.00

INR 0.00

INR 0.00

INR 1,871.69

INR 1,917.80

INR 1,965.05

INR 2,013.47

INR 2,063.07

Cost of Capital
Cumulated Cost of
Capital

12.38%

12.38%

12.38%

12.38%

12.38%

1.1238

1.2630

1.4194

1.5952

1.7927

Present Value

$1,665

$1,518

$1,384

$1,262

$1,151

Free Cashflow to Firm

Expected Growth Rate

10

3.28%

4.11%

4.93%

5.75%

6.57%

Terminal
Year

Cumulated Growth

116.65%

121.44%

127.42%

134.75%

143.60%

Reinvestment Rate

32.67%
INR
3,551.40
INR
1,160.33

25.34%
INR
3,697.23

18.02%
INR
3,879.41

10.69%
INR
4,102.43

3.36%
INR
4,371.96

INR
3,441.45

INR 937.06

INR 698.97

INR 438.55

INR 147.00

INR 115.72

INR 0.00
INR
2,391.07

INR 0.00
INR
2,760.17

INR 0.00
INR
3,180.44

INR 0.00
INR
3,663.88

INR 0.00
INR
4,224.95

INR 0.00
INR
3,325.73

Cost of Capital
Cumulated Cost of
Capital

12.38%

12.38%

12.38%

12.38%

12.38%

2.0147

2.2642

2.5446

2.8597

3.2138

Present Value

$1,187

$1,219

$1,250

$1,281

$1,315

EBIT * (1 - tax rate)

- (CapExDepreciation)
-Chg. Working Capital
Free Cashflow to Firm

Growth Rate in Stable Phase =

Reinvestment Rate in Stable
Phase =
FCFF in Stable Phase =

6.57%
3.36%
INR 3,325.73

Cost of Equity in Stable Phase =

18.98%

Equity/ (Equity + Debt) =

AT Cost of Debt in Stable Phase
=

51.45%

Debt/ (Equity + Debt) =

48.55%

Cost of Capital in Stable Phase =

Value at the end of growth
phase =

12.38%

5.40%

INR 57,207.56

Valuation
Present Value of FCFF in high growth phase

INR 13,232.89

Present Value of Terminal Value of Firm

INR 17,800.40

Value of operating assets of the firm

INR 31,033.29

Value of Cash, Marketable Securities & Non-operating assets

INR 611.48

Value of Firm

INR 31,644.77

Market Value of outstanding debt

INR 16,067.71

Minority Interest in consolidated holdings

INR 116.12

Market Value of Equity

INR 15,460.94

Value of Equity in Options

INR 0.00

Value of Equity in Common Stock

INR 15,460.94

Market Value of Equity/share

INR 587.87

Market Value of Equity/share in BR

INR 587.87

Points to Ponder
1. Working capital is taken zero because the working capital is negative though the firm can
generate positive cash flows even if working capital is negative but in long run it may prove
dangerous
2. Company enjoys high tax holidays and tax exemptions given in infra- sector thus the
effective tax rate for past 5 years is 12% quite less
3. On valuation the share price valued at 587 Re and it is trading currently at 593 re