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Reliance Industries: Refining boosts margins - Views on News from Equitymaster

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Reliance Industries: Refining boosts margins
Jan 25, 2011

Reliance Industries has announced its 3QFY11 results. The company reported 5.2%YoY and 28.1% YoY increase in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales increase by a modest 5.2% YoY during the quarter. For the 9 month period, net sales were up 30.1% YoY.
  • Operating margins were up by 2.2% YoY during the quarter. For the 9 months period, the margins remained stable on a year on year basis.
  • Net profits were up by 28.1% during the quarter. For the 9 months period, the net profits were up by 29.4%YoY.


Standalone financial snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 568,560 597,890 5.2% 1,348,910 1,754,960 30.1%
Expenditure 490,120 502,440 2.5% 1,134,460 1,472,130 29.8%
Operating profit (EBDITA) 78,440 95,450 21.7% 214,450 282,830 31.9%
EBDITA margin (%) 13.8% 16.0%   15.9% 16.1%  
Other income 5,080 7,410 45.9% 18,450 21,350 15.7%
Interest 5,500 5,490 -0.2% 14,720 16,320 10.9%
Depreciation 27,950 33,590 20.2% 71,050 102,210 43.9%
Profit before tax 50,070 63,780 27.4% 147,130 185,650 26.2%
Profit before tax margin (%) 8.8% 10.7%   10.9% 10.6%  
Tax 9,990 12,420 24.3% 31,870 36,550 14.7%
Profit after tax/(loss) 40,080 51,360 28.1% 115,260 149,100 29.4%
Net profit margin (%) 7.0% 8.6%   8.5% 8.5%  
No. of shares (m)         3,271  
Diluted earnings per share (Rs)*         60.0  
Price to earnings ratio (x)*         16.3  
Based on the trailing 12 month period earnings

What has driven performance in 3QFY11?
  • Reliance Industries registered highest ever revenues on back of strong performance in all the three segments - refining (72% of sales), petrochemicals (22% of sales) and oil & gas (5% of sales) which grew by 9.4% YoY, 8.2%YoY and 18.4%YoY, respectively. Revenues in the Oil & gas segment increased due to the increase in production from KG D6 basin, partially offset by lower production from Panna Mukta and Tapti fields.

    Segmental results summary
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Refining            
    Revenues 480,000 525,240 9.4% 1,119,990 1,527,270 36.4%
    EBIT 13,790 24,360 76.6% 40,250 66,630 65.5%
    EBIT margin 2.9% 4.6%   3.6% 4.4%  
    Petrochemicals            
    Revenues 147,560 159,620 8.2% 398,030 4,449,610 1017.9%
    EBIT 20,550 24,290 18.2% 66,790 63,590 -4.8%
    EBIT margin 13.9% 15.2%   16.8% 1.4%  
    Oil & Gas            
    Revenues 35,300 41,780 18.4% 83,310 131,460 57.8%
    EBIT 14,770 15,040 1.8% 37,110 51,310 38.3%
    EBIT margin 41.8% 36.0%   44.5% 39.0%  

  • Operating margins were up by 1.8% YoY and 1.3% YoY for refining and petrochemicals, respectively. However, margins declined by 5.8% YoY for the oil and gas segment. The quarter was the best for Petrochemicals division due to strong product demand.

  • The gross refining margins (GRMs) for refining division came at US$ 9.0 per barrel during the quarter (versus US$ 5.9 per barrel). For 9 months period, the GRMs came at US$ 8.1 per barrel (versus US$ 6.2 per barrel last year).Despite a lower quantity of crude processed during the quarter (down 3% YoY) and certain planned shutdowns ,refining segment registered strong performance on back of high product prices.

  • Net profits were up by 28.1% YoY on the back of strong performances in refining and petrochemicals segments. The net profit margins registered 1.5% YoY increase during the quarter.

What to expect?
We expect Reliance Industries to reap benefits from new investments in Exploration and production activities. However, due to commissioning of new capacities, we expect the margins for refining and petrochemicals segment to stabilize. The group's foray into shale gas and telecom should also act as a positive catalyst for the stock.

At the current price of Rs 975 the stock is trading at a multiple of 16.3 times its trailing 12 months standalone earnings versus an industry PE of 18. Though we expect the group to continue to perform well, issues like complex group structure and inadequate disclosure make assessment of its intrinsic value a difficult task.

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