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RIL: The giant marches on - Views on News from Equitymaster

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RIL: The giant marches on

Apr 21, 2008

Performance summary
  • Topline increases by 20% YoY during FY08 due to superior realisations.
  • EBITDA margins decline marginally to 17.5% due to the higher crude and naphtha prices.

  • Other income zooms by 87% YoY during FY08 on the back of increased interest income on higher surplus funds.

  • Bottomline (including exceptional income) registers a growth of 63% YoY during FY08. Excluding fractional stake sale in Reliance Petroleum, adjusted for tax, bottomline registers a 29% YoY growth.

  • Topline and bottomline grow 36% YoY and 24% YoY respectively in 4QFY08.

Standalone financial snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 274,480 372,860 35.8% 1,116,930 1,334,430 19.5%
Expenditure 222,790 312,680 40.3% 916,470 1,101,370 20.2%
Operating profit (EBDITA) 51,690 60,180 16.4% 200,460 233,060 16.3%
EBDITA margin (%) 18.8% 16.1% 17.9% 17.5%
Other income 1,250 2,890 131.2% 4,780 8,950 87.2%
Interest 2,880 2,720 -5.6% 11,890 10,770 -9.4%
Depreciation 12,270 13,800 12.5% 48,150 48,470 0.7%
Profit before tax 37,790 46,550 23.2% 145,200 182,770 25.9%
Exceptional Item - - - 47,330
Tax 6,230 7,430 19.3% 25,770 35,520 37.8%
Profit after tax/(loss) 31,560 39,120 24.0% 119,430 194,580 62.9%
Net profit margin (%) 11.5% 10.5% 10.7% 14.6%
No. of shares (m) 1,393.5 1,453.6
Diluted earnings per share (Rs) 133.9
Diluted earnings per share (exl. excpt item) (Rs)* 106.2
Price to earnings ratio (x) 19.7
Price to earnings ratio (exl. excpt item) (x) 24.8
* Effective tax @ 15% on exceptional item added back

What has driven the performance in FY08?
  • Topline registered a 20% YoY growth in FY08, while expenditure grew 20%. Bottom line grew by 29% YoY in FY08, excluding the exceptional item of stake sale in Reliance Petroleum and adjusted for tax. On a consolidated basis, the increase in revenue in FY08 was due to 12% increase in realisations and a 6% growth in volumes. Consumption of raw materials increased by 17% YoY in FY08 on a consolidated basis on account of higher crude and naphtha prices.

    Cost break-up
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 191,270 280,980 46.9% 780,380 981,790 25.8%
    % sales 69.7% 75.4% 69.9% 73.6%
    Staff cost 5,410 5,760 6.5% 20,940 21,190 1.2%
    % sales 2.0% 1.5% 1.9% 1.6%
    Other expenditure 26,130 25,930 -0.8% 115,150 98,390 -14.6%
    % sales 9.5% 7.0% 10.3% 7.4%
    Total cost 222,810 312,670 40.3% 916,470 1,101,370 20.2%
    % sales 81.2% 83.9% 82.1% 82.5%

  • During FY08, the refining segment EBIT recorded a 34% increase. This can be explained by the improvement in margins from 9% in FY07 to over 10% in FY08 as well as a refinery utilisation rate of over 96% in FY08. The refinery achieved a throughput of 32 m tonnes of crude during the year. The company exported 67% of its production in FY08. Exports have registered a 25%YoY growth during the year. However, the growth in refining EBIT has slowed down recently as can be seen in the 9% growth achieved on a QoQ basis in 4QFY08.

    Refining Segment
    (Rs m) FY07 FY08 Change
    Revenues 859,320 1,007,430 17.2%
    EBIT 77,240 103,320 33.8%
    EBIT margin 9.0% 10.3%
    (Rs m) 4QFY07 4QFY08 Change
    Revenues 210,250 286,860 36.4%
    EBIT 22,750 28,390 24.8%
    EBIT margin 10.8% 9.9%
    (Rs m) 3QFY08 4QFY08 Change
    Revenues 261,540 286,860 9.7%
    EBIT 26,140 28,390 8.6%
    EBIT margin 10.0% 9.9%

  • RILís refining margins were US $ 15/bbl in FY08, up from US $ 11.7/bbl in FY07. Margins peaked in 2QFY08 due to high light product cracks and tightened product markets but dropped thereafter due to increased crude prices and reduced cracks.

  • The petrochemicals segment registered a 5% YoY growth in FY08 at the revenue level. Higher realisations accounted for 2% of the sales growth while higher volumes accounted for the balance 3%. It benefited from the strong demand from downstream user segment, higher production and firm prices across the value chain. The segment grew 8% at the EBIT level. High feedstock prices impacted the petrochemicals business in 3QFY08 and 4QFY08.

    Production ('000 tons) FY07 FY08 Change
    Production 18,669 19,647 5.2%
    Polymers 3,214 3,374 5.0%
    Polyester 1,482 1,572 6.1%
    Polyester intermediates 4,335 4,714 8.7%
    Results (Rs m) FY07 FY08 Change
    Revenues 503,710 530,000 5.2%
    EBIT 65,780 71,130 8.1%
    EBIT margin 13.1% 13.4%

  • 85% of RILís debt is foreign currency denominated. During FY08, the rupee appreciated by 7.7% against the US dollar. As a result, Interest costs were lower by 9.4% in FY08 on account of appreciation of the rupee vis-ŗ-vis the US dollar.

  • Exceptional item of Rs 47.3 bn represents gains primarily arising out of transactions concerning the sale of stake in Reliance Petroleum.

  • During the year, RIL incurred capital expenditure of Rs. 195 bn. The capital expenditure was largely for the upstream oil and gas business.

    Particular (Rs m) FY07 FY08
    E & P 57,250 134,430
    Refining & Marketing 14,300 26,610
    Petrochemicals 4620 5060
    Common 13,630 28,930

What to expect?
RILís refining segment is expected to deliver robust GRMs 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. However with lower per capita consumption in the domestic markets coupled with a booming economy, higher volumes are going to propel the petrochemical EBIT.

RILís investments in 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 to Kurdistan, Oman, Yemen and Columbia. There exists immense potential regarding further upside to the companyís current reserves. However, lack of clarity regarding the size of potential reserves along with issue in commercialisation of the large-scale CBM blocks make valuations difficult.

At the current price of Rs 2,635 the stock is trading at a multiple of 25 times its FY08 earnings, excluding exceptional item. RILís share price has registered gains on the back of positive news flows in the new ventures. However, the value of the current business seems to be fairly factored into the valuation. Thus, we believe focus has now significantly shifted to execution of the new ventures. RIL has a proven track record and superior execution capabilities. However, the nature of the execution risk in the new ventures is different from what the company has faced in the past.

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