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Reliance Industries: The giant wobbles - Views on News from Equitymaster

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Reliance Industries: The giant wobbles
Jan 22, 2009

Performance summary
  • Topline decreases by 9% YoY during 3QFY09.
  • EBITDA margins remain stable at 17% in 3QFY09.
  • Other income zooms 175% YoY during the quarter.
  • Excluding exceptional item, bottomline registers a decline of 10 % YoY during 3QFY09.
  • For 9mFY09, topline grows 23%, while bottomline increases 3%, excluding exceptional item.


Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 345,900 315,630 -8.8% 961,570 1,179,290 22.6%
Expenditure 287,570 262,000 -8.9% 788,700 999,710 26.8%
Operating profit (EBDITA) 58,330 53,630 -8.1% 172,870 179,580 3.9%
EBDITA margin (%) 16.9% 17.0% 18.0% 15.2%
Other income 2,410 6,630 175.1% 6,060 10,400 71.6%
Interest 2,530 4,840 91.3% 8,050 12,150 50.9%
Depreciation 12,130 13,170 8.6% 34,670 37,320 7.6%
Profit before tax 46,080 42,250 -8.3% 136,210 140,510 3.2%
Exceptional item 47,330 - 47,330 -
Tax 12,620 7,240 -42.6% 28,080 23,180 -17.5%
Profit after tax/(loss) 80,790 35,010 -56.7% 155,460 117,330 -24.5%
Net profit margin (%) 23.4% 11.1% 16.2% 9.9%
No. of shares (m) 1,574
Diluted earnings per share (Rs)* 99
Price to earnings ratio (x)* 11.4
* On trailing twelve months basis

What has driven the performance in 3QFY09?
  • RIL recorded a topline decline of 9% YoY during 3QFY09 and a bottomline de-growth of 10% YoY excluding exceptional item. For 9mFY09 topline grew by 23%, while bottomline increased 3%, again excluding exceptional item.

  • In the upstream segment, RIL commenced oil production from the KG D6 basin in 3QFY09 with an initial production of 5,000 barrels per day. The companyís international upstream assets 15 blocks with acreage of about 108,095 square kilometers Ė 4 in Peru, 3 in Yemen, 2 each in Oman, Kurdistan and Colombia, 1 each in East Timor and Australia.

    Refining Segment
    (Rs m) 3QFY08 3QFY09 Change
    Revenues 261,540 217,400 -16.9%
    EBIT 26,140 18,810 -28.0%
    EBIT margin 10.0% 8.7%  

  • In the refining segment, RIL's gross refining margins (GRM) decreased to US$ 10 per barrel from US$ 15.4 per barrel during 3QFY08. The company continues to perform better on this front compared to its peers on the back of efficient sourcing of crude oil, ability to produce globally accepted products and flexibility in its crude bucket, product slate and evacuation infrastructure. However, details on these factors are not available. Reliance Petroleum commenced operations during the quarter.

    Petrochemicals segment
    Results (Rs m) 3QFY08 3QFY09 Change
    Revenues 127,060 126,230 -0.7%
    EBIT 17,780 16,570 -6.8%
    EBIT margin 14.0% 13.1%  

  • In the petrochemicals segment, 3QFY09 witnessed a steep decline in product as well as raw material prices. Naphtha prices decreased by 66%, while polymer product prices decreased by 45% to 50% and polyester product prices decreased by 25% to 30%. Lower level of product prices led to increased domestic demand.

  • Exceptional item during 3QFY08 represents gains primarily arising out of transactions concerning Reliance Petroleum shares.

  • RIL adjusts the foreign currency exchange differences on amounts borrowed for acquisition of fixed assets, to the carrying cost of fixed assets. Had the treatment as per the accounting standard 11 (AS11) been followed, the net profit after tax for 9mFY09 would have been lower by Rs 11.8 bn.

  • The capital expenditure incurred during the period was Rs 181 bn primarily in the oil and gas business

What to expect?
RILís refining segment is expected to deliver better GRMs compared to its peers 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.

RILís investments in exploration and production (E&P), organised retail and development of special economic zones (SEZs) will all be the cornerstones for future growth. In the E&P segment, it has expanded its international E&P footprint significantly. There exists immense potential regarding further upside to the companyís current reserves.

At the current price of Rs 1,132 the stock is trading at a multiple of 11.4 times its standalone trailing 12 months earnings. While the stock has considerably come down from its all time highs, our view on the company is tempered by the following issues:

  • A complex group structure including private companies;
  • Loans and advances to promotersí private firms;
  • Gross refining margins that do not follow regional trends; and
  • Poor disclosure of information in areas like segment wise sales and cost break up, purchase and sales information and hedging positions for crude oil.

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