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Reliance: 4QFY03 blues

Apr 24, 2003

Reliance Industries declared its fourth quarter and full year performance for the year ended March 2003. While revenues have risen by 9% for FY03, net profit has leapfrogged by 27%. The rise in net profit could be attributed to lower interest expenses and higher other income. Though operating margins for the full year have declined only marginally, in 4QFY03, there is a sharp correction.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Net sales 99,930 127,550 27.6% 420,890 458,980 9.0%
Other Income 2,050 3,260 59.0% 7,820 10,010 28.0%
Expenditure 80,000 107,370 34.2% 342,130 375,330 9.7%
Operating profit (EBDIT) 19,930 20,180 1.3% 78,760 83,650 6.2%
Operating profit margin (%) 19.9% 15.8%   18.7% 18.2%  
Interest 3,590 3,340 -7.0% 18,250 15,550 -14.8%
Depreciation 7,390 8,770 18.7% 28,160 28,370 0.7%
Profit before Tax 11,000 11,330 3.0% 40,170 49,740 23.8%
Extraordinary income 540 - - 4,120 - -
Tax 3,190 320 -90.0% 11,860 8,700 -26.6%
Profit after Tax/(Loss) 8,350 11,010 31.9% 32,430 41,040 26.5%
Net profit margin (%) 8.4% 8.6%   7.7% 8.9%  
No. of Shares 1,053.8 1,396.0   1,053.8 1,396.0  
Diluted earnings per share (Rs)* 31.7 31.5   30.8 29.4  
P/E ratio (x)         9.4  
*(annualised)            

Reliance is the country's largest producer of petrochemical products (polyester filament yarn, polyester staple fibre, polymers and the like) with a market share of 51%. There has been strong topline growth in 4QFY03. This was led by increased realisations, albiet with marginal growth in volumes. The company's performance in the petrochemicals segments has been better as compared with its refining business and was driven by higher realisations.

For FY03 as a whole, production of oil & gas and petrochemicals increased to 11.8 million tonnes, representing a growth of 3%. Though volume growth in on the lower side, the concentration on speciality products has contributed significantly in terms of value realisation during the course of the year (command a premium of 5%-25% as compared to commodities). Speciality grades contributed to 19% of polymer production, 59% of PSF and 27% of PFY output. On the macro front, the global demand growth is expected to exceed global capacity additions by an estimated 6 MMT over the next three years. This could help improve the global demand supply balance and consequently, the pricing environment. Polymers contribute the largest share to RIL's revenues and the company would benefit from any improvement in the cycle.

On the refining front, the Jamnagar refinery produced 28.6 million tonnes of crude with capacity utilisation at 106% for FY03 (116% in 4QFY03). Domestic demand for petroleum products showed signs of improvement in FY03 (2% overall rise as compared to a marginal dip last year). Exports however, were on the lower side (down 24% YoY). Following the dismantling of the administered price mechanism, private operators are eligible for setting up marketing presence. Reliance received the approval for the same in May 2002 for setting up over 5,800 outlets. This will benefit the company in the long run.

Operating margins have declined considerably in 4QFY03, which could be attributed to the escalation of feedstock and key raw material prices in line with the spurt in crude prices. Crude prices rose during the course of the year due to various factors like Venezuelean strike, disruption in production in Nigeria (especially sweet crude) and US led coalition attack on Iraq. To put things in perspective, raw material costs as a percentage of sales increased to 84% in 4QFY03 from 64% in the same period last year (67% in FY02 to 75% in FY03).

Net profit for FY03 is higher by 27% and was helped by lower interest costs resulting from refinancing some of its high cost debts. The rise in net profit is on the higher side at 45%, if one were to exclude extraordinary income arising out of profit from sale of stake in L&T to Grasim.

The stock currently trades at Rs 275 implying a P/E multiple of 9.4x FY03 earnings. In FY04, the pressure on margins is expected to reduce when one considers the fact that crude prices have already softened. Fundamentally speaking, as we mentioned earlier, the demand-supply mismatch that was hurting realisation growth in the past is likely to shift favorably in the next two years. This is likely to benefit Reliance in a large way. Amidst all these positives, significant investment in telecom and refining distribution is a worrying aspect, owing to the execution risks involved in the initial years. Reportedly, Reliance Infocomm has managed to add 1 m Wireless in Local Loop (WiLL) subscribers till March 2003. The all India launch of this service is expected in May 2003 and it remains to be seen how the company fares on this front. With cellular players already planning to match Reliance's tariffs on the CDMA front, competition is stiff. This could keep investors at bay.


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