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RIL: Refining outshines petrochemicals - Views on News from Equitymaster
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RIL: Refining outshines petrochemicals
Jan 18, 2008

Performance summary
  • Topline increases by 23% YoY during 3QFY08 driven by superior realisations.

  • EBITDA margins declines to 17% due to costlier petrochemicals feedstock.

  • Other income zooms by 101% YoY during the quarter on the back of increased interest income on higher surplus funds.

  • Bottomline registers a growth of 26% YoY excluding the exceptional item of fractional stake sale in Reliance Petroleum Limited.

  • Topline and bottomline grow 14% YoY and 29% (excl. except item), YoY respectively in 9mFY08.

Financial snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 281,950 345,900 22.7% 842,450 961,570 14.1%
Expenditure 230,150 287,570 24.9% 693,680 788,700 13.7%
Operating profit (EBDITA) 51,800 58,330 12.6% 148,770 172,870 16.2%
EBDITA margin (%) 18.4% 16.9% 17.7% 18.0%
Other income 1,200 2,410 100.8% 3,530 6,060 71.7%
Interest 3,060 2,530 -17.3% 9,010 8,050 -10.7%
Depreciation 12,740 12,130 -4.8% 35,880 34,670 -3.4%
Profit before tax 37,200 46,080 23.9% 107,410 136,210 26.8%
Exceptional Item - 47,330 - 47,330
Tax 6,390 12,620 97.5% 19,540 28,080 43.7%
Profit after tax/(loss) 30,810 80,790 162.2% 87,870 155,460 76.9%
Net profit margin (%) 10.9% 23.4% 10.4% 16.2%
No. of shares (m) 1,453.6
Diluted earnings per share (Rs)* 124.1
Diluted earnings per share (exl. excpt item) (Rs)* 91.5
Price to earnings ratio (x)* 24.2
Price to earnings ratio (exl. excpt item) (x)* 32.7
(*On trailing twelve months earnings)

What has driven performance in 3QFY08?
  • Increase in topline in 9mFY08 was due to an 8% increase in prices and a 5% growth in volumes.

  • Gross Refining Margin (GRM) for 3QFY08 was at US$ 15.4/bbl and for 9mFY08 was US$ 14.9/bbl. For 2QFY08, the GRM was US$ 13.6/bbl. The increase in GRMs was due to production of middle distillate products (Gasoil and Jet / Kerosene) where margins remained firm with strong global demand. For 9mFY08, the refinery processed 23.7 million tonnes (mt) and achieved an operating rate of 96%.

    Refining Segment
    (Rs m) 3QFY07 3QFY08 Change
    Revenues 208,700 261,540 25.3%
    EBIT 19,250 26,140 35.8%
    EBIT margin 9.2% 10.0%
    (Rs m) 2QFY08 3QFY08 Change
    Revenues 235,750 261,540 10.9%
    EBIT 23,210 26,140 12.6%
    EBIT margin 9.8% 10.0%

  • Petrochemicals production grew by 4% to 14.5 mt, against 14.0 mt for the 9mFY08. However, for 3QFY08, production actually declined by 1.5% due to the planned shutdown for 19 days at the Paraxylene unit at Jamnagar.

    Petrochemicals segment
    Production ('000 tons) 3QFY07 3QFY08 Change
    Production 4,841 4,768 -1.5%
    Polymers 852 852 0.0%
    Polyester 389 392 0.8%
    Polyester intermediates 1,076 1,114 3.5%
    Results (Rs m) 3QFY07 3QFY08 Change
    Revenues 131,450 127,060 -3.3%
    EBIT 17,880 17,780 -0.6%
    EBIT margin 13.6% 14.0%

  • Consumption of raw materials increased by 33% during 3QFY08 mainly on account of higher crude prices. Other expenditure decreased by 23% mainly due to lower incidence of sales tax on account of higher export of refinery products and exchange differences.

    Cost break-up
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Raw materials 194,690 258,380 32.7% 589,120 700,800 19.0%
    % sales 69.1% 74.7% 69.9% 72.9%
    Staff cost 5,040 5,770 14.5% 15,530 15,440 -0.6%
    % sales 1.8% 1.7% 1.8% 1.6%
    Other expenditure 30,420 23,420 -23.0% 89,030 72,460 -18.6%
    % sales 10.8% 6.8% 10.6% 7.5%
    Total cost 230,150 287,570 24.9% 693,680 788,700 13.7%
    % sales 81.6% 83.1% 82.3% 82.0%

  • Interest costs were lower by 17% for 3QFY08 primarily on account of appreciation of the rupee vis-ŗ-vis US dollar as a significant portion of RILís debt is US dollar denominated.

What to expect?
RILís refining segment is expected to deliver robust GRMs going forward, on the back of superior product mix and complex refinery configuration. On the petrochemical front, margins are going to reduce gradually with incremental capacities coming on stream in the Middle East region this year onwards. However with lower per capita consumption in the domestic markets coupled with a booming economy, higher volumes are going to propel the petrochemical EBIT.

RILís investments in E&P, organised retail and development of special economic zones (SEZs) will all be the cornerstones for future growth. In the E&P segment, KG basin has proved to be a world-class oil and gas field for the country. RIL, being one of the major operators active in the area, is set to benefit from the same. Moreover, there exists immense potential regarding further upside to the current reserves. However, lack of clarity regarding the size of potential reserves along with issue in commercialisation of the large-scale CBM blocks once again make valuations difficult.

At the current price of Rs 2,996 the stock is trading at a multiple of 33 times its trailing 12 months earnings. RILís share price has registered gains on the back of positive news flows in the new ventures. However, the value of the current business seems to be fairly factored into the valuation. Thus, we believe focus has now significantly shifted to execution of the new ventures. RIL has a proven track record and superior execution capabilities. However, the nature of the execution risk in the new ventures is different from what the company has faced in the past.

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