Price recovery, inventory buildup drive profits at Reliance

Reliance announced a 40% growth in turnover for the third quarter ended December 31st, 1999 over the corresponding period last year. The total expenditure has grown by 36%, while operating margins excluding other income have improved from 17% to 20%. The turnover grew by 25% over the past nine months with 14% of that being accounted by volumes and 11% from the increase in average product prices. The turnover included the interdivisional sales of Rs 37 bn, the excise duty of Rs.15 bn. During the nine months the company capitalised interest to the extent of Rs 2.59 bn.

The production volumes over the same period have grown by 21% (vis-à-vis sales volumes of 14%). Thus there has been a creation of inventories primarily because there was a price correction in end product prices during the month of December. The company expects additional volume movements in the last quarter.

Reliance derives 37% of its revenues from plastics, 22% from polyester, 24% from fibre intermediates, 14% from chemicals and the balance from oil and gas and textiles put together.

What is creditable about the improvement in margins is the fact that feedstock prices moved up significantly during the year. For instance, crude prices were up 53% in January (since April 1999) while naphtha prices were up 38% over the same period. The company put in place the 1.4 mn tonne paraxylene (PX) and 600,000 tonne polypropylene facility in Jamnagar six months back. This saved its operating margins in the sense that PX prices (which is an important feedstock) have shot up 40% between April 1999 and January 2000.

Besides domestic product selling prices also broadly tracked the international rise in prices. Thus Poly Vinyl Chloride (PVC) prices were up 36% during FY 2000 while polyester staple fibre (PSF) shot up 34%.

Depreciation has only increased marginally to Rs 2.58 bn from the level of Rs 2.08 bn. This despite the Jamnagar polyproylene facilities going on stream six months back. Besides, the company has not provided for any tax in the current quarter. These too together have also contributed to the net profit growth of 55%.