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RIL faces the heat

Apr 23, 2002

Reliance Industries Ltd. (RIL), the flagship company of the Reliance group, has decalred its results for full year ending March '02. 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.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Net Sales 59,000 61,760 4.7% 254,290 228,720 -10.1%
Other Income 1,780 1,430 -19.7% 3,830 5,750 50.1%
Expenditure 45,650 48,940 7.2% 202,500 181,470 -10.4%
Operating Profit (EBDIT) 13,350 12,820 -4.0% 51,790 47,250 -8.8%
Operating Profit Margin (%)22.6%20.8% 20.4%20.7% 
Interest 2,910 2,010 -30.9% 12,160 9,310 -23.4%
Depreciation 4,240 4,760 12.3% 15,650 17,350 10.9%
Profit before Tax7,9807,480-6.3%27,81026,340-5.3%
Extraordinary items - -   - 3,580  
Tax 390 760 94.9% 1,350 1,780 31.9%
Profit after Tax/(Loss) 7,590 6,720 -11.5% 26,460 28,140 6.3%
Net profit margin (%)12.9%10.8% 10.4%11.6% 
No. of Shares 1,054 1,054   1,054 1,054  
Diluted Earnings per share*28.825.5 25.126.7 
P/E Ratio     10.9  
(* annualised)      

On first glance, turnover of the company seems to have taken a major hit in FY02 with sales declining by double digits. In FY01, RIL registered significant amount of merchant exports, which were sourced from RPL. For fiscal ended March '02, RPL undertook majority of its exports, which impacted sales of RIL. Merchant sales were lower by 67%. That said, excluding merchant exports, sales of the company have declined by 3.9% and 5.6% respectively for the quarter and year ended March '02. Net sales have also been helped by lower excise duties. The effective excise duty rate has reduced by 1.4%.

Exports, which had doubled in FY01, grew by a paltry 3.3% in FY02. Slowdown in global trade hampered the company's performance. Besides exports, the slowdown in the domestic economy accompanied with higher competition could have kept pressure on volumes. However, much of the emaciated performance at the topline is due to lower realisations, especially post September 11, as prices were lowered to boost demand. Consumption of polyester and polymers is estimated to have increased by 5% and 16% respectively for FY02. Since start of the new calendar year petrochem prices have been strengthening. We expect the core business of RIL to witness a turn in fortunes over the next two years.

Operating profits of the company are lower, as a result of a drop in sales. For the full year, RIL has managed to protect margins. We had mentioned that operating margins are likely to sustain, as average feedstock (naphtha) prices have ruled lower compared to FY01 and reduced more than final product prices. Raw material costs are lower by 18% for FY02. Also, the company has been able to lift realisations by focusing on specialty products, which command higher rates compared to commodity prices. Specialty products now constitute 20%-30% of production. With a spurt in oil prices, which is likely to have reflected on naphtha prices in 4QFY02, margins for the quarter have taken a hit. However, with oil prices expected to cool down to $20-$22/ barrel, resulting in some respite for margins.

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. Other income of the company has increased substantially for FY02. This is primarily due to dividends earned from Reliance Petroleum Ltd. (RPL)., which are being accounted for on a pro-rata basis over the four quarters. Other income also includes interest earned on bonds issued by Reliance Infocom. Adjusting for other income, pre-tax profits would be lower by 14%. This indicates that the earnings from core business have deteriorated. Post tax profits has been lifted by extraordinary items, which pertain to sale of L&T stake to Grasim.

At Rs 291, the scrip is quoting at a multiple of 10.9x FY02 annualised earnings. Adjusting for extraordinary items, the multiple rises to 12.5x. Approval for amalgamation of RPL with RIL is pending approval from the High Courts of Mumbal and Ahemdabad. The merged entity is likely to undergo a phase of capital intensive projects. These include exploration & production activities, building of petro retail outlets, participating in the privatisation of HPCL, BPCL & IPCL and the executing the infocom project. Consequently, the project risk is likely to increase, which could cap valuations.

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