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RIL: Under pressure

Apr 23, 2002

Reliance Industries Ltd. (RIL), the petrochemical major, is set to declare results today along with its refining subsidiary Reliance Petroleum Ltd. (RPL). The companies are likely to declare separate results. The merger between the two companies is still pending High Court approval.

(Rs m) FY01 FY02E Change
Net sales 254,290 215,574 -15.2%
Other Income 3,830 6,751 76.3%
Expenditure 202,500 169,962 -16.1%
Operating Profit (EBDIT) 51,790 45,611 -11.9%
Operating Profit Margin (%) 20.4%21.2% 
Interest 12,160 9,628 -20.8%
Depreciation 15,650 17,320 10.7%
Profit before Tax 27,810 25,414 -8.6%
Extraordinary items - 3,580  
Tax 1,350 1,273 -5.7%
Profit after Tax/(Loss) 26,460 27,721 4.8%
Net profit margin (%) 10.4%12.9% 
No. of Shares 1,054 1,054  
Diluted Earnings per share 25.1 22.9  
P/E Ratio 13.7 12.8  

FY02 has been a tough year for RIL. The company was faced with lower realisations. Commodity prices were hit, as brakes were applied on global economic growth rates. The weakened domestic economy, which accounts for approximately 85% of sales, led to lower demand. Feedstock prices continued to remain volatile, especially in the second half of the fiscal. However, we believe, that compared to the previous fiscal (FY01) feedstock prices are likely to be lower, which could support operating margins. Adding to the woes was increased competition, which ate into the company's market share. Consequently, revenues of RIL are likely to manifest these strains.

The company has been reducing interest cost over the past four quarters. This is likely to be through improved efficiency in working capital, refinancing of high cost debt and repayment of loans. The lower operating profit is likely to take toll on pre-tax profits, despite higher other income and lower interest costs. However, post tax profits has been lifted by extraordinary items, which pertain to sale of L&T stake to Grasim. Adjusting for other income, profits were likely to be lower by 9%.

At Rs 294 the scrip is trading on a multiple of 12.8x FY02E earnings. Over the past year, valuations of the company have retracked due to the difficult business environment. Going forward, valuations could continue to be under pressure from project risks, as the merged entity is likely to pass through a phase of heavy capital expenditure.


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