Sunday, May 18, 2008

Reliance Naturally Resourceful Limited

The stock is currently at Rs 110. It has come down from a 52 week high of Rs 248. I am not going to dwell into PE ratio’s ( just about 263 times ) to discuss whether it is currently undervalued or overvalued.

This post is about something different.

I just ran through the FY08 results that the company has posted on the BSE site.

As on Mar – 08

Equity - 816 crores
Reserves - 913 crores
Total networth - 1729 crores

Scenario 1
Let’s examine how much debt the company can take on its balance sheet.

1) Debt equity ratio
Let us assume that the company can leverage its balance sheet and take debt in a 2:1 ratio or let me be more generous maybe 3:1.

Networth - 1729 crores
Total Debt - 5187 crores

2) Interest Cover Ratio
Let’s assume a interest cover ratio of 2:1 and RNRL can borrow at 8%.
EBIDTA – 170 crores ( Mar 08 )
Total Debt - 1060 crores

Assuming we have a Corporate banker who is willing to take risks then he would potentially open to lend about Rs 5187 crores to RNRL on the balance sheet.

Scenario 2
Loan against shares
Current market Cap - 18054 crores
Haircut ( 60% ) – 7221 crores
(I have been ultra conservative there are bankers, NBFC’s who would give more)

So you can borrow about 7200 crores by placing RNRL stock as collateral.

The banker won’t be willing to lend more than 5200 crores for the companys balance sheet / operations but the same banker would be willing to lend over 7200 crores against the company’s stock.

Imagine the gap when the stock was at Rs 250.

I rest my case.

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