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Reliance Industries: Petchem outshines refining - Views on News from Equitymaster
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Reliance Industries: Petchem outshines refining
Jan 22, 2010

Performance summary
  • Net sales increase by 92% YoY during 3QFY10, led by a 143% growth in the company's refining business. Revenues from the petrochemical business grow by 17% YoY.
  • Operating margins decline by 4.4% YoY (to 13.8%). This is largely on account of higher raw material costs (as a percentage of sales).
  • Gross refining margins stood at US$ 5.9 per barrel during the quarter, as compared to US$ 10 per barrel in 3QFY09.
  • Net profits grow by 16% YoY during the quarter on the back of topline growth despite lower margins, other income, depreciation and taxes.
  • During 9mFY10, topline grows by 17% YoY while bottomline registers a decline of 1%.

Standalone financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 295,640 568,560 92.3% 1,157,650 1,348,910 16.5%
Expenditure 241,950 490,120 102.6% 977,890 1,134,460 16.0%
Operating profit (EBDITA) 53,690 78,440 46.1% 179,760 214,450 19.3%
EBDITA margin (%) 18.2% 13.8%   15.5% 15.9%  
Other income 6,630 5,080 -23.4% 10,400 18,450 77.4%
Interest 4,840 5,500 13.6% 12,150 14,720 21.2%
Depreciation 13,230 27,950 111.3% 37,490 71,050 89.5%
Profit before tax 42,250 50,070 18.5% 140,520 147,130 4.7%
Tax 7,630 9,990 30.9% 23,700 31,870 34.5%
Profit after tax/(loss) 34,620 40,080 15.8% 116,820 115,260 -1.3%
Net profit margin (%) 11.7% 7.0%   10.1% 8.5%  
No. of shares (m)         3,270  
Diluted earnings per share (Rs)*         47  
Price to earnings ratio (x)*         22.2  
* On trailing twelve months basis

What has driven the performance in 3QFY10?
  • Reliance Industries posted a topline growth of 92% YoY during 3QFY10 led by a 143% growth in the company's refining business. Revenues from the petrochemical business grew by 17% YoY.

  • In the oil & gas (exploration & production) business, the company achieved higher earnings before interest and taxes (EBIT) on account of the production from KG D6 fields. However, margins declined due to the higher depletion rate as compared to the production from Panna Mukta Tapti (PMT) fields.

    Exploration and production Segment
    (Rs m) 3QFY09 3QFY10 Change
    Revenues 10,310 35,300 242.4%
    EBIT 6,040 14,770 144.5%
    EBIT margin 58.6% 41.8%  

  • The company's refineries achieved an utilisation rate of 115% and 100% during the quarter. Gross refining margins stood at US$ 5.9 per barrel during the quarter, as compared to US$ 10 per barrel in 3QFY09. During the period, light-heavy crude differential were at their lowest in last few years. The middle distillate cracks were under pressure due to low industrial activity, low demand from transport sector and high inventory.

    Refining segment
    (Rs m) 3QFY09 3QFY10 Change
    Revenues 197,630 480,000 142.9%
    EBIT 18,810 13,790 -26.7%
    EBIT margin 9.5% 2.9%  

  • The petrochemical segment of Reliance Industries posted a strong performance during the quarter. Domestic demand for most of the petrochemical products remained strong. There was a substantial improvement in as the industry was operating on low level of inventory leading to higher domestic realisations.

    Petrochemicals segment
    (Rs m) 3QFY09 3QFY10 Change
    Revenues 126,210 147,560 16.9%
    EBIT 16,570 20,550 24.0%
    EBIT margin 13.1% 13.9%  

  • Reliance Industries recorded a 4.4% YoY decline in operating margins (to 13.8%).This is largely on account of higher raw material costs, i.e. crude oil and naptha (as a percentage of sales).

  • During 9mFY10, the Petroleum Trust sold 15 m equity shares of Reliance Industries. The Trust realised about Rs 32 bn, at an average price of about Rs 2,125 per share. After 31st December 2009, the Petroleum Trust further sold 59 m equity shares and realized about Rs 62 bn at an average price of about Rs 1,044 per share. Reliance Industrial Investments and Holdings, a wholly owned subsidiary of RIL, is a beneficiary of the Trust.

  • The company had an outstanding debt of Rs 700 bn as on 31st December 2009. It had cash and cash equivalent of Rs 160 bn.

What to expect?
While RIL's refining segment is currently witnessing margins pressure, it has a structural advantage vis-a-vis other refiners on the back of superior product mix and complex refinery configuration. Hence, its GRMs will rebound faster compared to its peers going forward. On the petrochemical front, margins are going to reduce gradually with incremental capacities coming on stream in the Middle East region.

RIL's 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 to 14 blocks. There exists immense potential regarding further upside to the company's current reserves.

At the current price of Rs 1,051 the stock is trading at a multiple of 22 times its standalone trailing twelve months earnings. While the stock is still off its all time highs, issues like complex group structure and inadequate disclosure in areas like segment wise sales and cost break up make assessment of its intrinsic value a difficult task.

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