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Reliance Industries: Margins under severe pressure - Views on News from Equitymaster
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  • Apr 23, 2009 - Reliance Industries: Margins under severe pressure

Reliance Industries: Margins under severe pressure
Apr 23, 2009

Performance summary
  • Topline increases by 9.6% YoY during FY09.
  • EBITDA margins decline to 16% in FY09.
  • Other income zooms 127% YoY during the year.
  • Including exceptional item, bottomline registers a decline of 22% YoY during the year.
  • For 4QFY09, topline declines by 24%, while bottomline declines by 9.4%.

Standalone financial snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 372,860 283,620 -23.9% 1,334,430 1,462,910 9.6%
Expenditure 312,680 229,250 -26.7% 1,051,450 1,228,960 16.9%
Operating profit (EBDITA) 60,180 54,370 -9.7% 282,980 233,950 -17.3%
EBDITA margin (%) 16.1% 19.2%   21.2% 16.0%  
Other income 2,890 9,930 243.6% 8,950 20,330 127.2%
Interest 2,720 4,770 75.4% 10,770 16,920 57.1%
Depreciation 13,800 13,270 -3.8% 98,390 50,590 -48.6%
Profit before tax 46,550 46,260 -0.6% 182,770 186,770 2.2%
Exceptional item - (3,700)   47,330 (3,700)  
Tax 7,430 7,100 -4.4% 35,520 30,280 -14.8%
Profit after tax/(loss) 39,120 35,460 -9.4% 194,580 152,790 -21.5%
Net profit margin (%) 10.5% 12.5%   14.6% 10.4%  
No. of shares (m)         1,574  
Diluted earnings per share (Rs)         97  
Price to earnings ratio (x)         18.1  

What has driven the performance in 4QFY09?
  • The standalone topline of Reliance Industries (RIL) grew by 9.6% during FY09 mainly on the back of increase in prices.

  • The refining segment of the company clocked gross refining margin of US$ 12.2 per barrel for FY09 as against US$ 15.0 per barrel in the previous year. Refinery product cracks witnessed high volatility during the year. Having begun strongly, product cracks declined sharply in the second half of the year on the back of lower crude prices and demand contraction. The company surrendered the EOU status for its refinery in order to focus on domestic demand for petroleum products.

    Refining Segment
    (Rs m) 4QFY08 4QFY09 Change
    Revenues 286,860 216,310 -24.6%
    EBIT 28,390 19,530 -31.2%
    EBIT margin 9.9% 9.0%

  • In the petrochemicals segment, RIL witnessed pressure in product as well as raw material prices primarily on account of volatility in crude oil and economic scenario.

    Petrochemicals segment
    Results (Rs m) 4QFY08 4QFY09 Change
    Revenues 141,190 97,240 -31.1%
    EBIT 14,660 17,220 17.5%
    EBIT margin 10.4% 17.7%

  • RIL commenced production of both oil and gas from the KG basin D6 block during the year. It has tied up with 12 customers in the fertiliser sector for supply of 15 m standard cubic meters per day of natural gas.

  • Exceptional item represents provision of Rs. 3.7 bn, towards estimated claims on account of subsidiaries. However, the company has not elaborated further on the amount.

  • Reliance Petroleum (RPL), RILís subsidiary commence operations of its refinery during the year. RIL purchased 5% of RPLís equity from Chevron during the year. Further RPL merged with RIL with an exchange ratio of 1 share of RIL for every 16 shares of RPL.

  • The company has an outstanding debt as on 31st March 2009 of Rs 535 bn at the consolidated level. It has cash and cash equivalents of nearly Rs 250 bn in the form of fixed deposits, certificate of deposits with banks and Government securities.

  • RIL incurred a capital expenditure of Rs 249 bn during the year.

What to expect?
While RILís refining segment is currently witnessing margins pressure, it has a structural advantage vis-ŗ-vis other refiners on the back of superior product mix and complex refinery configuration. Hence, its GRMs will rebound faster compared to its peers going forward. On the petrochemical front, margins are going to reduce gradually with incremental capacities coming on stream in the Middle East region.

RILís investments in exploration and production (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 significantly to 15 blocks. There exists immense potential regarding further upside to the companyís current reserves.

At the current price of Rs 1,758 the stock is trading at a multiple of 18.1 times its standalone FY09 earnings (including exceptional item). While the stock is still off its all time highs, our view on the company is tempered by the following issues:

  • A complex group structure including private companies;
  • Loans and advances to promotersí private firms;
  • Gross refining margins that do not follow regional trends; and
  • Poor disclosure of information in areas like segment wise sales and cost break up, purchase and sales information and hedging positions for crude oil.

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