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RPL: Awaiting the merger - Views on News from Equitymaster
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  • Apr 23, 2002

    RPL: Awaiting the merger

    One of the two Reliance group behemoths has announced unaudited results for FY02. The company operates a 27 m tonne refinery, which commenced operations in FY01. In March '02, RIL announced plans to merge the subsidiary with itself. The proposal is awaiting High Court approval. The fiscal ended March '02 was a tough year for refinery companies, as domestic demand stagnated, international petroleum prices weakened while crude oil prices exhibited volatility. In this backdrop, the performance of RPL is commendable. The results have matched market expectations.

    (Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
    Sales 75,060 76,200 1.5% 309,630 331,170 7.0%
    Other Income 660 1,570 137.9% 2,200 2,950 34.1%
    Expenditure 65,970 69,440 5.3% 278,450 299,430 7.5%
    Operating Profit (EBDIT) 9,090 6,760 -25.6% 31,180 31,740 1.8%
    Operating Profit Margin (%) 12.1% 8.9%   10.1% 9.6%  
    Interest 3,050 2,200 -27.9% 10,320 9,550 -7.5%
    Depreciation 1,920 1,940 1.0% 6,610 8,020 21.3%
    Profit before Tax 4,780 4,190 -12.3% 16,450 17,120 4.1%
    Extraordinary items (640) -   (640) 600  
    Tax 300 140   1,170 980  
    Profit after Tax/(Loss) 3,840 4,050 5.5% 14,640 16,740 14.3%
    Net profit margin (%) 5.1% 5.3%   4.7% 5.1%  
    No. of Shares 4,753 5,202   4,753 5,202  
    Diluted Earnings per share* 3.2 3.1   3.1 3.2  
    P/E Ratio       16.5 8.0  

    The growth in sales for full year is likely to have been driven by improved volumes, as the company augmented operating rates to 107% from 95% in FY01. Consequently, production has increased by 12.7% during the period. Another indication of higher sale volumes has been the draw down in inventory. In 4QFY02, the company managed to stem the slide in sales experienced in the third quarter. Much of the economic slowdown over the past twelve months took grip in 4QFY01, negating the YoY effect. With stabilisation of operations in 2QFY01, sales of the company have grown in single digits.

    Overall industry consumption was stagnant in FY02, growing by a marginal 1%. Demand was largely impacted by the decline in diesel and kerosene consumption, which declined by 2.2% and 8.7% respectively. However, light distillates -- petrol & LPG -- managed to register a healthy growth of 6.3% and 10% respectively. The company is likely to have been able to protect its topline by altering the product mix on a dynamic basis, ensuring greater adaptability to meet market demand. Also, RPL has been able to consistently tap export markets due to higher grade of petroleum products.

    At the operating level, profit have declined over the past two quarters. The sharp dip in operating profits for 4QFY02 is due to a 3.2 percentage points drop in margins. For most of the year, RPL had managed to protect its margins despite stagnancy in sales and lower margins reported by its peers. This is due to the superior configuration (complexity) of the refinery. RPL can take advantage of difference in prices of sour and sweet (sulphur content) crude to better protect margins on a dynamic basis. With Israeli - Palestine skirmish and threat of military action against Iraq crude oil prices soared in 4QFY02. Higher prices coupled with continuing sluggishness in petroleum prices could have affected margins during this period.

    In July '01, the outstanding equity shares of the company increased by 449 m on account of conversion of warrant equity shares. The warrants were attached with debentures, which are likely to have matured leading to lower interest burden. Interest expense has been declining over the past three quarters. Adjusting for other income, pre-tax profits for 4QFY02 could have been lower by 36%. The company is exempted from income-tax for a period of seven years. The tax provisions is due to minimum alternate tax (MAT).

    RPL has been granted marketing rights of aviation turbine fuel (ATF) and has applied for rights of other petroleum products including petrol, diesel, LPG and kerosene. The company has entered into a two year agreement with India Oil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) to evacuate an estimated 13 MMTPA of products. Nevertheless, as per reports, RPL will independently foray into retailing of transportation fuels. Also, the company is likely to be a keen contender in tendering for BPCL and/or HPCL. This could result in big-ticket expenditures over the next two years.

    At Rs 26 the scrip is trading on a multiple of 8x FY02 earnings. Internationally, pure refining companies tend to trade at these levels. Post approval from the High Courts, 11 shares of RPL will be exchanged for 1 share in RIL.



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