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RIL: Some cheers…at last!

Jan 22, 2005

Introduction to results
Reliance Industries, the country's largest private sector hydrocarbons major, announced its 3QFY05 and 9mFY05 results yesterday. For 3QFY05, the company has posted a robust topline growth of over 42% while the bottomline has increased sharply by over 52%. For 9mFY05 also, while the topline has registered a decent 28% growth, the bottomline has improved by over 41%.

What is the company’s business?
Reliance Industries is the country’s largest private sector company having interests across the hydrocarbons value chain. The company, along with subsidiary, IPCL, controls over 70% of the country’s domestic polymer capacity. Further, the acquisition of the German company, Trevira, by Reliance makes it the largest polyester manufacturer in the world. The company also has interests in the upstream petroleum sector, whereby it has participating interests in existing oil and gas fields, while it is likely to begin commercial production from its Krishna Godavari fields in 2007. It has recently ventured into fuel retailing with nearly 300 outlets.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 125,000 177,680 42.1% 376,940 482,120 27.9%
Expenditure 99,340 144,780 45.7% 304,970 389,470 27.7%
Operating profit (EBDITA) 25,660 32,900 28.2% 71,970 92,650 28.7%
EBDITA margin (%) 20.5% 18.5% 19.1% 19.2%
Other income 2,230 3,310 48.4% 6,610 9,740 47.4%
Interest 3,640 2,050 -43.7% 9,450 11,070 17.1%
Depreciation 8,010 9,120 13.9% 22,790 27,420 20.3%
Profit before tax 16,240 25,040 54.2% 46,340 63,900 37.9%
Extraordinary items - - 1,070 - -100.0%
Tax 2,500 4,130 65.2% 7,860 11,100 41.2%
Profit after tax/(loss) 13,740 20,910 52.2% 37,410 52,800 41.1%
Net profit margin (%) 11.0% 11.8% 9.9% 11.0%
No. of shares (m) 1,396.0 1,396.0 1,396.0 1,396.0
Diluted earnings per share (Rs)* 39.4 59.9 35.7 50.4
Price to earnings ratio (x) 8.5 10.2
(* annualised)

What has driven performance in 9mFY05?
Robust pricing helps realizations: During the 9mFY05, topline has improved by nearly 28%. Of this, 24% could be attributed to higher product prices while the balance is on account of higher volumes. Firm petrochemical and petroleum product prices in the international markets helped boost realizations. The company also witnessed a jump of 51% in export earnings. Although the company sells petroleum products to oil marketing PSUs in the domestic markets at a discount, higher prices on a YoY basis explains the growth in the topline.

Expenditure Table
(%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
Consumption of raw materials 66.4% 72.3% 68.4% 70.4%
Staff cost 1.4% 1.2% 1.3% 1.2%
Other expenditure 11.7% 7.9% 11.2% 9.2%

Operating margins: For the 3QFY05, operating margins have declined while during the 9mFY05 period, the margins have improved marginally by 10 basis points. The drop in margins during the December quarter could largely be attributed to raw material costs (forming over 80% of expenditure), which increased by 590 basis points. However, for the said period, strong product prices helped the company enjoy gross refining margins of US$ 8.2 per barrel, thereby arresting substantial decline in operating margins. Further, a decline of 380 basis points on the other expenditure front helped matters.

Other income boosts bottomline: The bottomline YoY growth of over 52% during 3QFY05 is largely a result of higher other income component, which has grown by over 48% during the period. Also helping boost the bottomline was lower interest outgo, which reduced by nearly 44% during the quarter. For 9mFY05 also, the bottomline growth of 41% is aided by the other income growth of over 47%. But for a rise in interest outgo during the year (due to foreign exchange differences), the bottomline could have been better for the 9mFY05 period.

What to expect?
At Rs 512, the stock is trading at a price to earnings multiple of 10.2 times annualized 9mFY05 earnings. The current petrochemicals uptrend has helped Reliance post record profits for seven consecutive quarters. Given the firm international demand on the back of no significant capacity addition, Reliance is likely to continue to gain in the medium term.

Also, refining margins are likely to remain robust in wake of high crude oil prices and growing demand for petroleum products. All in all, the company is likely to continue on a higher growth trajectory during the medium term. Its retail foray is also going strong with product sales witnessing twice the volumes per outlet as compared to the PSUs. Although the company has not made any significant breakthrough in the retail business, it is likely to continue to grow over the next couple of years.

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