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RELIANCE INDUSTRIES LIMITED

INTRODUCTIONOF COMPANY

The Reliance group, founded by Dhirubhai H. Ambani (1932-2002), in 1966 is India's

largest private sector enterprise, with businesses in the energy and materials valuechain. Group's annual revenues are in excess of US$ 28 billion. The flagship

company, Reliance Industries Limited, is a Fortune Global 500 company and is the

largest private sector company in India.

According to the company website "1 out of every 4 investors in India is a Reliance

shareholder". Reliance has more than 3 million shareholders, making it one of the

world's most widely held stocks.

Reliance Industries Limited has a wide range of products from petroleum

products, petrochemicals, to garments (under the brand name of Vimal), Reliance

Retail has entered into the fresh foods market as Reliance Fresh and launched a new

chain called Delight Reliance Retail and NOVA Chemicals have signed a letter of intent to

make energy-efficient structures. The primary business of the company is petroleum

refining and petrochemicals. It operates a 33 million tone refinery at Jamnagar in the

Indian state of Gujarat. Reliance has also completed a second refinery of 29 million tons

at the same site which started operations in December 2008. The company is also

involved in oil & gas exploration and production.

DEVIDENDDECISIONS

The term dividend refers to that part of profit (after tax) which is distributed to the

shareholders who are the real owners of the company. The amount which is

undistributed part rest out of the profits of the company is known as Retained earnings.

Higher the dividend payout, lower will be retained earnings.

The dividend policy of a company refers to the views and policies of the management

with respect of distribution of dividends. The dividend policy of a company should aim

at shareholder-wealth maximization but it also moves according to the sentiments of

the market as well as to the prospects of the company as RelianceIndustries Limited is

doing from last many of years to provide wealth maximization to the shareholders with

providing dividends as well as the prices of their shares in stock market has also been

increasing which is benefitting the owners with capital gains in their shares.


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2008-09 2007-08 2006-07 2005-06

Net worth 114520.39 80577.34 61255.02 45154.07

Capital Employed 188494.12 117057.02 89140.89 67019.68

Market capitalization (Rs. In

crores) 309984.75 331541.82 186067.02 142492.51

Net Sales (Rs. In crores) 141959 133805.78 111699.03 80877.79

PBIDT 25373.75 28934.64 20524.51 14982.01

PAT(Rs. In crores) 15309.32 19458.29 11943.4 9069.34

Earning Per Share(Rs.) 95.24 131.97 84.28 63.7

Market Per Share(Rs.) 2132.46 2280.8 1280.6 980.24

Payout (%) 12.66 8.5 12.27 14.7

Retention (%) 87.34 91.5 87.73 85.3

Dividend (annual) % 130 130 110 100

dividend (Rs.) 13 13 11 10

Return on investment (%) 13.66 19.3 23.59 23.18

WALTER MODEL

Prof James E. Walter devised an easy and simple formula to show how dividend can be

used to maximize the wealth of shareholders. He considers dividend as one of the

important factors determining the market valuation. According to Walter, in the long

run, share prices reflect the present value of future stream of dividends. Retained

earnings influence stock prices only through their effect on further dividends.

2009 2008 2007 2006

EPS 95.24 131.97 84.28 63.7

Rate of ROI (%) ( r ) 13.66 19.3 23.59 23.18

retention rate (b) 87.34 91.5 87.73 85.3

cost of capital( k ) 4.46 5.78 6.56 6.49

Dividend 13 13 11 10


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Walter Model (p)

(E-D)r/k 251.88 397.25 263.52 191.80

P 5939.08 7097.80 4184.72 3109.36

According to this model if the ROI from retained earnings is higher than the market

capitalization rate then the value of its shares would be high even if the dividends are

low. As given in the case of RIL the dividends are very less and retention rate is very high

, nearly 90% of the profits but still the companys share price is increasing which is due

to their difference in returns rate and market capitalization rate as given in above table

the difference is around 10-15% on positive side.

This Walter model is showing a fact that why market prices of shares of growth

companies are high even if dividend payout is low, so it is proved that Walter model ofdividend is very accurate in proving relation of dividend with market prices.

GORDON MODEL

Myron Gordon has developed a model that dividends are relevant and the dividend

decision of the company affects its value. There are many assumptions taken for this

approach, like rate of return on investment is constant, retention ratio is constant, cost

of capital is also constant and higher than growth rate of the firm, corporate taxes do

not exist.

GORDON MODEL(P0)

br 11.93 17.66 20.70 19.54

k-br -7.47 -11.88 -14.14 -13.05

P0 1100.71 1005.3693 517.109 406.5843

DIVIDENDTREND

From last 4 years, the sale of RIL has been increased by huge amounts and theprofit of the company is also increasing in huge amounts and dividend paid by RIL

is also increasing year by year.

As the trend is given there, 100% of the face value had been declared as dividendin 2005-06( previous to this, in 2004-05 that was 75% i.e. Rs. 7.5/.share) and then


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RIL is declaring more dividends in the further years, like 110%, 130% for two

years.

This shows the companys strong prospects for their future profits as they aredeclaring more dividends year by year. It also provides a sense of benchmark for

the dividends to the shareholders of Reliance Industries.

RELATION B/W EPS & DIVIDEND

There is always a relation between earning per share and dividend declared bythe company to its shareholders. Companies like to keep earnings and dividends

pretty stable. This is because changes in these elements indicate broader changesfor the company related to their profitability, current position and future

prospects.

Earning per share of three years, i.e. 2006,07,08 are increasing from Rs. 63 to Rs.131 and in response to this company had given dividend @ 100%, 110% & 130%,

at increasing rates. This shows that company is giving much return to their

shareholders as their part of profits.

But if we take a look at the Earning Per Share of 2009 i.e. Rs. 95, which is lessthan the previous years EPS and the company had not increased its dividend as it

was doing from last 3 years, but still they maintained to gave them the same

dividend as to the related previous year i.e. 130%. That may be some tactics to

meet the expected demands of the shareholders that is the dividend paid by RIL

in related previous year i.e. 130%.

This shows about the relationship between EPS & dividends as companygenerally tries to trace the EPS and move towards giving the increased value to

the shareholders and also provides the good indication of the profitability & cash

position of the company to the market.

RETENTIONRATE,DIVIDEND & MARKET PROSPECTS

The percentage of earnings credited to retained earnings is known as retention rate. In

other words, the proportion of net income that is not paid out as dividends is referred


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as retention rate. Generally, Company retains a part of its earnings as reserves which is

used for expansion of the company whether in terms of scale, scope, markets etc.

In the case of RIL, companys retention rate is very high in all of itsprevious years like, it is more than 85 % in 2006, 07, & 2009 and in 2008,

RIL retain 91% of their income and the company is paying just 8 % to 15 %

of its income to their shareholders as dividend. But still the share prices

are increasing time to time. All this happens due to companys growth and

prospects. If such type of huge company is retaining 90 % of their profits

that definitely have strong prospects with them.

Following are some of RILs expansion plans which was also assisted withsuch internal finance (retained earnings)-

o In 2004-05, RIL acquired the polyester major, Trevira GMBH, headquartered inFrankfurt, Germany which has the capacity of 130,000 tonnes per annum of

polyester staple fibers, polyester filament yarns and polyester chips.

o In the year 2006, the company set up a new export-oriented refinery through itssubsidiary, Reliance Petroleum Limited (RPL).

o In the year 2007, Indian Petrochemicals Corporation Limited (IPCL) merged withthe RIL. Also, Reliance Retail entered the organized retail market in India with the

launch of its convenience store format under the brand name of 'Reliance Fresh'.

o During the year 2007, the company commissioned their largest expansionproject. The company expanded its polypropylene (PP) capacity by 280 KTA atJamnagar that increased the combined capacity to 1,710 KTA.

o During the year 2007-08, the company signed an agreement to certain polyester(capacity) assets of Hualon, Malaysia. It took over the majority control of Gulf

Africa Petroleum Corporation (GAPCO) and started shipping products to the East

African markets. RIL also signed MoU (Memorandum of understanding) with

GAIL (India) Ltd to explore opportunities of setting up petrochemical plants in

feedstock rich countries outside India.

There are many other expansion of RIL in these years, this is the only reason that evenafter declaring 15 % of profits as dividends, the companys share price is increasing after

announcement date because the shareholders and the market knew of such capability

of the company to invest in expansion plans from where shareholders would get more

benefits thats why the share price of Reliance Industries Limited have positive

movement even after declaring their dividends due to market & future prospects.


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SHAREHOLDERS WEALTH MAXIMIZATION

Reliance is that company which is providing maximum values to their shareholders, the

form could be different as it has already been mentioned that companys dividend

payout ratio is very low( less than 15%) but still shareholders are having benefits in one

way or other. Shareholders are receiving Rs. 10, 11, 13, 13 as dividends in last 4 years,

but their capital gain from the increase in value of shares was remarkable which had

created much wealth for their shareholders. Their retention of profits generally provide

a positive effect to the market because market prospects of this company is very wide

and that is the thing which affect its share price and directly attain the main goal of the

company i.e. wealth maximization.

ANALYSISOF2009-10DIVIDENDDECLARATION

The result of 2009-10 has not been fully disclosed by the date, but some of the related

information is available below-

FACE

VALUE

BOOK

VALUE Div(%)

Net profit (rs

in crores)

EPS

(rs.)

M. Cap

(crores)

10 392.5 70 16236 49.6 341279.5

The board of Reliance Industries in its meeting on 23 April 2010 has recommended

dividend at the rate of Rs. 7 per share (70%).

DATE OPEN LOW CLOSE

23-Apr-10 1088 1081.25 1087.35

On the date of declaration of dividends, the market share price was not havingany movement in its prices, as the volumes were traded on higher side. Volume

of shares traded on the date of declaration of dividend was 10, 63,400 but their

movement in price range for that date was very low as given in the above table.

Reliance Industries is declaring just 70 % of their profits as dividends for this year,which is almost half of the previous dividend of 2008-09, that was 130%.

Companys declaration is not according to the markets sentiments but still the

share price of RIL have not any downside on its share prices that mayb be due to

their good profits which is giving an indication of further investment by the

company as they are retaining 93 % for their reserves.


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Here the EPS is also very low than previous 4 years EPS. The average Earning PerShare for last 4 years was Rs. 93.75 but the EPS of 2009-10 is just Rs. 49.6 which is

approximately half of the previous figures. It is not a good sign for the company,

generally people consider this, but the reduction in their EPS is only due to

increase in number of equity shares due to bonus issue in 2009 which increasedthe number of shares and due to which EPS got reduced, this is the one of the

drawback of bonus issue as it affects the indicators (EPS is one of the profit

indicators) of the company. But still the profits are more than Rs. 16,000 crores

which is a positive value for the shareholders and that assist in maintaining the

share prices stable in the market.

BONUSSHARES

Bonus shares are those shares which are actually free shares of stock given to the

current shareholders, based upon the number of shares that a shareholder owns. These

bonus shares are issued to the existing shareholders by converting free reserves or

share premium account to equity capital. A company also issue bonus shares if they

dont have much cash reserves to meet the payment of dividend in cash, thats why

some companies issue bonus shares.

But if we see the case of Reliance Industries Limited, it is not the reason because at the

same time company is also announcing the 130 % cash dividend to their shareholders

which shows that they have much amount of cash reserves with them.

BONUSISSUE

Year month ratio Record date

2009 october 1:01 27/11/2009

Company had announced this bonus on 17th

of November and the record date was set

to 27th of November, 2009, this announcement has been made after 12 years as the last

bonus was issued in October 1997.

Due to their announcement of the record date the flow was moving towards negative.

The share price of RIL got affected and in next three days, it flowed under negative sign,

as shown in the following table-


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DATE OPEN LOW CLOSE DIFFERENCE

19-Nov-09 2,099.95 2,072.25 2,081.95 -18.00

18-Nov-09 2135.45 2095.1 2102.45 -33.00

17-Nov-09 2163.01 2106 2133.75 -29.26

This proves that market sentiments move with declaration of bonus shares, but

afterwards it come back to same level.

On the date of issue of bonus shares the market price of RIL shares got a dip by

approximately half to its prices, as it is clearly shown in the graph below that the share

price in line of Rs. 2000s dipped to Rs. 1000s. this mechanism automatically make no

effect of bonus share issue to the market capitalization or the wealth of the

shareholders in terms of increasing numbers of shares because the price got reduced

and the value of their holdings still have the same value.

Following is the graph showing the movement of share price of RIL in stock market

This bonus issue was declared by the company as their part of reward to shareholders at

the time of completion of two global projects.

At the time of this bonus issue, CFO of RIL gave a statement that "Reliance is now ready

to invest in the future. It has a strong balance-sheet, large cash reserves and substantial

EFFECTOF BONUSSHARESON MARKET PRICEOFRIL SHARES.


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financial flexibility owing to its treasury stock holding, which have a current value of

nearly Rs 40,000-crore (Rs 400 billion).

It depicts the strong position of the company at current level as well for long term

position. At that time, when RIL is announcing 130% dividend with 1:1 bonus share, the

statement having such strong prospects for the company that they are ready to invest in

the future shows the very proficient position for the future growth.

RILs bonus issue had following major effects-

y Share capital gets increased according to the bonus issue ratio.y Liquidity of RILs shares in the market increases.y This issue also reduces the Earnings per share, Book Value and other per share

values.

y As we have seen in above graph, the market price gets adjusted on issue ofbonus shares.

All the above explanations, relations and dependency of one aspect on other states that

market price depends upon many aspects like dividend, retention ratio, company

previous performance, expansion prospects, growth opportunities, prospects of

shareholders, intention of the company with their dividend declaration policies.

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