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RIL: Goliath takes a hit

Jan 31, 2002

The weaker economic environment in the domestic market has taken a significant toll on the Indian petrochemical behemoth, Reliance Industries Ltd. (RIL). The company faced a subdued demand environment, both in the domestic and international markets. Petrochemical product prices have been sliding since start of the fiscal. Finally, increased competition in key segments has put further pressure on the business.

(Rs m) 3QFY01 3QFY02 Change
Net sales 58,330 52,610 -9.8%
Other Income 510 1,370 168.6%
Expenditure 44,780 42,390 -5.3%
Operating Profit (EBDIT) 13,550 10,220 -24.6%
Operating Profit Margin (%) 23.2% 19.4%  
Interest 2,940 2,180 -25.9%
Depreciation 3,940 4,410 11.9%
Profit before Tax 7,180 5,000 -30.4%
Extraordinary items - 3,580  
Tax 340 360 5.9%
Profit after Tax/(Loss) 6,840 8,220 20.2%
Net profit margin (%) 11.7% 15.6%  
No. of Shares 1,054 1,054  
Diluted Earnings per share* 26.0 31.2  
P/E Ratio   9.6  

Sales in the current quarter have been buoyed to a certain extent by merchant sales. These include petroleum exports on behalf of Reliance Petroleum Ltd. (RPL) amounting to Rs 2,990 m for the quarter ended December '01. For FY01, RIL was undertaking merchant exports for RPL, which could be due to the latter awaiting Government approvals. For the first two quarters of the current fiscal, RPL was exporting independently. Excluding merchant sales, RIL's topline has declined by 13.1%. Also, while net sales have fallen by 13%, excise duty has declined by 30%.

The company seems to have destocked, which has added to the cost. The decline in expenses seems to be driven by lower raw material costs. With oil markets cooling off, the benefits have flowed to downstream products. Prices of naphtha, the key raw material, have softened in the current fiscal. The trend could have accentuated in the current quarter, as oil prices have dropped to $19/ barrel. The YoY effect has further heightened, as oil prices were ruling near ten year highs ($30/ barrel) in the same quarter of last fiscal. Raw material expenses declined by 20% YoY. However, the dip in sales and lower operating margins have pulled down operating profits.

Considering the difficult operating environment the company has been cutting back on its finance expense. Interest costs have declined in all the quarters of the current fiscal. This is due to the ongoing debt re-financing efforts to take advantage of lower interest rates and bring down finance costs. Also, the company has repaid some of its debt in the current fiscal. For certain assets, the company has changed the method of depreciation to written down value (WDV) method, which has led to restating 3QFY01 depreciation upwards by 410 m. To that extent, pre-tax profits are lower for the concerned period.

The extraordinary items pertains to sale of L&T stake to Grasim. As on March 31, 2001, RIL and its 100% subsidiary, Reliance Industrial Investments & Holding Ltd. (RIIHL), together held 16.5 m (6.6% stake) shares of L&T. Subsequently, in the current fiscal, RIIHL holdings in L&T were transferred to RIL. Also, RIL acquired an additional estimated 8.4 m shares from the market during this period raising aggregate holding to 24.9 m shares or 10% the EPC & cement major's share capital. Therefore, the entire consideration from sale of stake has accrued to RIL. Adjusting for other income and extraordinary items, pre-tax profits would be down 45%.

At Rs 300, the scrip trades on a multiple of 9.6x 3QFY02 annualised earnings. Adjusting for extraordinary items, the valuations shoot to 17x annualised earnings. Considering valuations based on core business operations the stock could see further downside.

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