EVALUATING THE FIRM’S DIVIDEND POLICY

 Reliance are one of the firms that are very consistent with dividend distribution, regardless of the Free Cash Flow to
Equity (FCFE).
 The Board of Directors announce dividends based on the suggestions of the executive management. The interest of the
shareholders is considered with utmost seriousness and the following factors are taken into consideration while deciding
the dividend:
 Profits earned
 Retained Earnings
 Expected future capital/liquidity needs
 Miscellaneous

 The remaining retained earnings are claimed to be reinvested into the business, keeping in mind the best interests of the
stakeholders.
FCFE AND THE DIVIDEND MATRIX FRAMEWORK

 FCFE provides a measure of the total cash available to the entity that can be made available to the shareholders. The
depreciation and amortization costs, interests and taxes, changes in working capital, capital expenditures, debt
repayments are considered while arriving at this figure from the net income.
 The Equity Share Dividend as present in the Profit and Loss statement of a company provides information as to how
much the company paid out as dividends to its shareholders in the given period.
 A comparison of the two should help assess the company’s dividend policy. Although, inferences can’t be made purely by
these numbers, we have the dividend matrix framework to make a more informed inference.
FCFE AND THE DIVIDEND MATRIX FRAMEWORK
In Rs. Crores
Mar-17 Mar-18 Mar-19 Mar 20
Profit/Loss For The Period 31,425.00 33,612.00 35,163.00 30,903.00
Depreciation And Amortisation Expenses 8,465.00 9,580.00 10,558.00 9,728.00
Other Income 8,709.00 8,220.00 8,822.00 14,541.00
Total Current Assets 1,06,281.00 1,23,912.00 1,52,864.00 1,66,597.00
Total Current Liabilities 1,52,826.00 1,90,647.00 2,02,021.00 3,10,183.00
Change in WC -12,087.00 -20,190.00 17,578.00 -94,429.00
Non-Current Investments 1,40,544.00 1,71,945.00 2,72,043.00 4,19,073.00
Debt flow 857.00 2873.00 36502.00 60653.00
FCFE 33,629.00 43,074.00 -26,631.00 63,224.00
Equity Share Dividend 0 3,255.00 3,554.00 3,852.00

Bar the year (2019) when Reliance undertook high investment activities, we see that
they have regularly paid dividends, less than the cash surplus. Besides, given the good
projects in hand in their ever-expanding business, Reliance should fall in the first
quadrant and enjoy flexibility in setting dividend policies.

Aswath Damodaran’s dividend matrix

 Despite negative FCFE in 2019, Reliance have paid out dividends. Besides, the firm pay a higher dividend that most of
the other companies in the industry/conglomerate.
 With such a strong dividend policy, it is clear that Reliance have the full trust of the investors. We will further touch upon
the same as we value the company. Given the data at hand, we suggest no changes in the dividend policy for Reliance.
They are doing a better job than competitors and must carry on in similar fashion.
VARIABLE RATE DIVIDEND DISCOUNT MODEL (DDM)

 We have used a two-stage growth dividend discount model to value Reliance. Given the firm is regular with its dividends, the
DDM seemed an apt model for the same. The CoVID pandemic has provided an obstacle for most business and stalled growth.
One can also expect a sudden boom as India recovers from the pandemic.
 These factors have been taken into consideration in the two-stage growth model that later assumes a constant dividend growth
rate from the year 2023 onwards.
 Assumptions:
 Dividend drops by 15% for 2021, keeping in mind the CoVID pandemic. This rate has been arrived at by assuming constant net income and a payout
ratio of 10.67% (weighted average of past payout ratios, all within the range if 10-12%).
 Dividend growth rate of 10% due to boom post CoVID in 2022, followed by 5.9% until perpetuity. 5.9% is the median dividend growth rate across
the last 13 years.
 Payout ratio is constant at 1-.67% throughout
 WACC of 10.85% as calculated, is constant throughout/
VARIABLE RATE DIVIDEND DISCOUNT MODEL (DDM)
Actual data Estimates
Mar-16 Mar-17 Mar-18 Mar-19 Mar 20
Mar-21 Mar-22 Mar-23 Mar-24 Mar-25
Profit/Loss For The Period (In Rs. Crores) 27,417.00 31,425.00 33,612.00 35,163.00 30,903.00 30,903.00 33993.3 35998.905 38122.84 40372.09
Equity Dividend Rate (%) 105 110 60 65 65 55.00 60.50 64.07 67.85 71.85
Dividend per share (In Rs) 10.5 11 6 6.5 6.5 5.5 6.05 6.41 6.78 7.19
Dividend Growth rate   5% -45% 8% 0% -15% 10% 6% 6% 6%
Payout ratio 11% 0% 10% 10% 12% 11% 11% 11% 11% 11%
                     
Terminal value (In Rs)           5.5 6.05 137.07    
Discount factor           1.11 1.228772 1.362094    
Cash flows (In Rs)           4.96166 4.923614 100.63174    

WACC 10.85%
Perpetual growth rate 5.90%
Present value of discounted dividend 110.52
Total shares 6762068814
Calculated EV (Value of Equity) (In Rs. Crores) 74732.37
Reliance EV (In Rs. Crores) 926766.06
VARIABLE RATE DIVIDEND DISCOUNT MODEL (DDM)

 The present value of future dividends, factoring in the mentioned assumptions is Rs 110.52. If a shareholder decides to
hold Reliance shares unto perpetuity, he/she can expect the above-mentioned value of dividend per share.
 The current price of Reliance share is Rs. 1904.35. According to the DDM, the share is overvalued. We will see that
relative valuation of Reliance with other companies in the industries it operates in and in comparison with the industry
average will yield the same observation.
 The value of equity is found to be Rs. 74732.37 crores through the DDM. In comparison, the market value stands at Rs.
926766.06 crores. The key drivers are profit margins and a rich dividend history that attracts investors.
RELATIVE VALUATION OF RELIANCE

Relative valuation

Particulars Reliance industries ONGC Indian Oil JSW (Energy) Adani ABG
Market value per share(Rs) 1904.35 102.4 88.05 102.4 87.8 116.1
Earnings per share (Rs) 48.75 10.69 1.43 3.03 -5.77 0.13
P/E ratio 39.06 9.58 61.57 33.80 -15.22 893.08
ROE (%) 7.27 6.91 1.4 5.29 -18.68 0.31
EV (In Rs crores) 926766.06 98904.39 187110.8 8169.97 16303.86 10179
EV/EBITDA 13.96 2.12 8.37 7.48 18.69 75.34
Dividend 2020 (In Rs) 6.5 5 4.25 1 1 0

Industry average Power Petrochemicals Textiles Telecommunication

 The P/E ratio for reliance (39.06) is higher than ONGC, JSW, and Adani. It is also higher than the industry average P/E
ratio of any of the industries that the conglomerate operates in. A high P/E ratio is an indication that the firm is
overvalued in the market
 The EV/EBITDA ratio of 13.96 is higher than ONGC, Indian Oil and JSW. Although an EV/EBITDA ratio of less than
10 is preferred, 13.96 is acceptable. Nevertheless, this is another indication that the firm is overvalued in the market.
 An ROE of 7.27% is very healthy and Reliance enjoys a higher ROE than any of the companies taken for consideration.
These companies includes petrochemicals, power giants and conglomerates in an attempt to touch upon all businesses
that Reliance operate in.
INFERENCE ON RELATIVE VALUATION OF RELIANCE

 Clearly, Reliance is overvalued in the market. However this can mean two things – the firm is performing poorly, or the
investors are overly optimistic about future cash flows. We look at the reasons why the latter could be true.
 Consistency in dividend payments – The incredible dividend history of reliance attracts investors
 No abnormalities in past financials – A healthy balance sheet with little irregularities is always preferred
 Ever-expanding firm with constant growth – Reliance is one of the biggest conglomerates and continues to expand into new avenues
SUGGESTIONS ON ENHANCING VALUE OF THE FIRM

 Reliance boasts of healthy financials and a rich dividend history. That said, the firm can work on lowering the P/E ratio
and the EV/EBITDA ratio. This will be a consequence of increasing the value of the firm.
 In order to reduce the ratios, either the market value of Reliance must drop or the profit margins must soar. Given the
faith that the investors have shown in buying Reliance shares despite being overpriced due to the potential reasons as
mentioned, the firm must focus on the latter – increasing profit margins.
 As generic as it may sound, a company such as Reliance that is performing very well financially, an increase in Earnings
per Share (EPS) seems to be the best path to enhance the value.