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RPL: Softer oil markets saves day

Jan 30, 2002

As mentioned in our last quarterly earnings report, the slowdown in industry, which has hit the petroleum sector, has taken its toll on the largest greenfield refinery in the world, Reliance Petroleum Ltd. (RPL). The decline in sales seem largely due to lower international product prices.

(Rs m) 3QFY01 3QFY02 Change 9mFY01 9mFY02 Change
Sales 91,490 81,660 -10.7% 234,570 254,970 8.7%
Other Income 710 650 -8.5% 1,540 1,380 -10.4%
Expenditure 83,360 73,650 -11.6% 212,480 229,990 8.2%
Operating Profit (EBDIT) 8,130 8,010 -1.5% 22,090 24,980 13.1%
Operating Profit Margin (%) 8.9% 9.8%   9.4% 9.8%  
Interest 2,710 2,460 -9.2% 7,270 7,350 1.1%
Depreciation 1,720 2,010 16.9% 4,690 6,080 29.6%
Profit before Tax 4,410 4,190 -5.0% 11,670 12,930 10.8%
Extraordinary items - -   - 600  
Tax 330 170 -48.5% 870 840 -3.4%
Profit after Tax/(Loss) 4,080 4,020 -1.5% 10,800 12,690 17.5%
Net profit margin (%) 4.5% 4.9%   4.6% 5.0%  
No. of Shares 4,749 5,202   4,749 5,202  
Diluted Earnings per share* 3.1 3.1   2.8 3.3  
P/E Ratio   8.9     8.5  

Demand for petroleum products over the past eighteen months have been flat. For the nine months ended December '01, industry sales have remained stagnant. Sales of diesel and kerosene, which constitute the largest share in petroleum sales, have declined by 2.8% and 5.5% respectively during this period. Industry sales have been made up with higher offtake of lighter distillates, petrol and LPG. RPL has reported higher YoY operating rates and drop in inventories, which seems to indicate the damage to sales is due to realisations.

Despite lower realisations the company has managed to augment operating margins, which have risen by 90 basis points. Margins have been buoyed by a sharp decline in raw material costs, which makes up a lion's share in operating costs. In 3QFY01, oil prices were ruling at the highest and touched new ten-year highs during this period. In comparison, the oil market has cooled down significantly with prices quoting currently at $19/ barrel. This has led to the sharp drop in operating costs and buoyancy in margins.

Interest expense for the quarter has declined, which could be due to debentures maturing over the previous and current fiscal. Exercise of warrants attached with these securities has led to dilution in equity. With the refinery operating on full steam, the company seems to have become more aggressive in charging depreciation. The extra-ordinary item in 9mFY02 is towards receipt of insurance claim of Rs 600 m towards loss in profits from business interruption arising from the Gujarat earthquake.

Off late, RPL has been featuring often in the news. Under the current understanding the company sells its output through the Government run marketing companies, IOC, BPCL and HPCL in the proportion of 50%, 25% and 25% respectively. However, the Government has indicated that it will deregulate marketing of controlled products from FY03. Consequently, there will be no quota system for lifting products from any refinery. RPL had entered into an understanding with IOC that the latter will evacuate 50% of its output in the deregulated scenario and the balance would be sold through a marketing joint venture (JV) between IOC and RPL. However, this understanding has run into rough weather. As per reports, the JV is not likely to materialise and IOC is also hesitating to lift the balance output due to the sharp drop in petroleum demand. Consequently, sentiment towards the stock has taken a beating.

At Rs 27.6 the scrip is trading on a multiple of 8.5x 9mFY02 annualised earnings. Valuations over the last three quarters have been on a decline, sliding from 11.6x 1QFY02 annualised earnings. However, the valuations seem to be more in line with international peers.

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