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Reliance Industries: Petchem drives bottomline
Apr 24, 2010

Reliance Industries has announced its FY10 results. The company has reported a 36% YoY and 6% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales increase by 121% YoY during 4QFY10, led by a 165% growth in the company’s refining business. Revenues from the petrochemical business grow by 59% YoY.
  • Operating margins decline by 6% YoY to 16%. This is largely on account of higher raw material costs (as a percentage of sales).
  • Gross refining margins stood at US$ 7.5 per barrel during the quarter, as compared to US$ 9.9 per barrel in 4QFY09.
  • Net profits grow by 30% YoY during the quarter on the back of topline growth despite lower margins and lower other income.
  • During FY10, topline grows by 36% YoY while bottomline registers a growth of 6%.
  • Declares a dividend of Rs 7 per share.


Standalone financial snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 260,820 575,700 120.7% 1,418,470 1,924,610 35.7%
Expenditure 203,750 484,340 137.7% 1,181,640 1,618,800 37.0%
Operating profit (EBDITA) 57,070 91,360 60.1% 236,830 305,810 29.1%
EBDITA margin (%) 21.9% 15.9%   16.7% 15.9%  
Other income 10,200 6,150 -39.7% 20,600 24,600 19.4%
Interest 5,300 5,250 -0.9% 17,450 19,970 14.4%
Depreciation 14,460 33,920 134.6% 51,950 104,970 102.1%
Exceptional item (3,700) -     (3,700) -    
Profit before tax 43,810 58,340 33.2% 184,330 205,470 11.5%
Tax 7,540 11,240 49.1% 31,240 43,110 38.0%
Profit after tax/(loss) 36,270 47,100 29.9% 153,090 162,360 6.1%
Net profit margin (%) 13.9% 8.2%   10.8% 8.4%  
No. of shares (m)         3,270  
Diluted earnings per share (Rs)         50  
Price to earnings ratio (x)         21.9  

What has driven the performance in FY10?
  • Reliance Industries posted a topline growth of 36% YoY during FY10 led by a 51% growth in the company’s refining business. Revenues from the petrochemical business grew by 5% YoY, while the exploration and production business grew nearly 4 times during the year.

  • In the oil & gas (exploration & production) business, the company achieved higher earnings before interest and taxes (EBIT) on account of the production from KG D6 fields. However, margins declined due to the higher depletion rate as compared to the production from Panna Mukta Tapti (PMT) fields.

    Exploration and production Segment
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Revenues 7,360 43,180 486.7% 34,890 126,490 262.5%
    EBIT 4,710 17,020 261.4% 22,240 54,130 143.4%
    EBIT margin 64.0% 39.4%   63.7% 42.8%  

  • The company’s refineries achieved an utilisation rate of 98% during the year due to a planned shutdown of 19 days and a ramp-up of the SEZ refinery. Gross refining margins stood at US$ 6.6 per barrel during FY10, as compared to US$ 12.2 per barrel in FY09. During the period, light-heavy crude differential were at their lowest in last few years. The middle distillate cracks were under pressure due to low industrial activity, low demand from transport sector and high inventory.

    Refining segment
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Revenues 193,650 512,500 164.7% 1,079,940 1,632,490 51.2%
    EBIT 20,950 19,860 -5.2% 97,900 60,110 -38.6%
    EBIT margin 10.8% 3.9%   9.1% 3.7%  

  • FY10 was one of the best periods for petrochemicals segment. Increase in volume accounted for 14% growth in revenue offset by lower prices which accounted for 9% reduction in revenue. Domestic demand for most of the petrochemical products remained strong. There was a substantial improvement as the industry was operating on low level of inventory leading to higher domestic realisations.

    Petrochemicals segment
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Revenues 97,180 154,480 59.0% 527,580 552,510 4.7%
    EBIT 17,150 22,220 29.6% 68,480 85,810 25.3%
    EBIT margin 17.6% 14.4%   13.0% 15.5%  

  • Reliance Industries has entered into a joint venture with US based Atlas Energy, under which it will acquire a 40% interest in Atlas's Marcellus Shale acreage. The company surrendered the EOU status of its refinery to allow domestic sales.

  • The company made a 1:1 bonus issue during the year. The Petroleum Trust sold 89 m equity shares (adjusted for bonus issue) of Reliance Industries and realised about Rs 93 bn.

  • Reliance Industries had cash and cash equivalent of Rs 219 bn and debt of Rs 625 bn as on 31st March, 2010.

What to expect?
While RIL's refining segment is currently witnessing margins pressure, it has a structural advantage vis-ŕ-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.

RIL's investments in exploration and production and organised retail will be the cornerstones for future growth. In the E&P segment, it has expanded its international E&P footprint significantly to 13 blocks. It has also acquired a 40% interest in Atlas's Marcellus Shale acreage. There exists immense potential regarding further upside to the company’s current reserves.

At the current price of Rs 1,087 the stock is trading at a multiple of 22 times its standalone FY10 earnings. While the stock is still off its all time highs, issues like complex group structure and inadequate disclosure in areas like segment wise sales and cost break up make assessment of its intrinsic value a difficult task.

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