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Reliance Ind.: Weak GRMs drag bottomline - Views on News from Equitymaster
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Reliance Ind.: Weak GRMs drag bottomline
Apr 24, 2012

Reliance Industries Ltd (RIL) announced the fourth quarter results of financial year 2011-2012 (4QFY12). The company has reported a 17.2% YoY (year on year) growth in sales and 21.2% YoY decline in the net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales increase by 17.2% YoY during the quarter. For FY12, the sales were up 32.9% YoY.
  • Operating profits registered a sharp fall of 33.3% YoY during the quarter with operating margins at 7.7% versus 13.5% last year. For FY12, operating profits were down 11.8% YoY and margins came at 10.2% versus 15.4% last year.
  • Net profits during the quarter registered a decline of 21.2% YoY with net profit margins at 4.8% (versus 7.3% last year).For FY12, the net profits were down by 1.2% YoY with net profit margins at 6% (versus 8.1% last year).

Standalone financial snapshot
(Rsm) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 726,740 851,820 17.2% 2,481,700 3,299,040 32.9%
Expenditure 628,310 786,190 25.1% 2,100,440 2,962,850 41.1%
Operating profit (EBDITA) 98,430 65,630 -33.3% 381,260 336,190 -11.8%
EBDITA margin (%) 13.5% 7.7%   15.4% 10.2%  
Other income 9,170 22,950 150.3% 30,520 61,920 102.9%
Total Revenues 735,910 874,770 18.9% 2,512,220 3,360,960 33.8%
Interest 6,960 7,680 10.3% 23,280 26,670 14.6%
Depreciation 33,870 26,590 -21.5% 136,080 113,940 -16.3%
Ordinary Profit before tax 66,770 54,310 -18.7% 252,420 257,500 2.0%
Ordinary Profit before tax margin (%) 9.1% 6.2%   10.2% 7.8%  
Exceptional items       - -  
Reported Profit Before Tax 66,770 54,310 -18.7% 252,420 257,500 2.0%
Reported Profit Before Tax Margin (%) 9.1% 6.2%   10.2% 7.8%  
Tax 13,010 11,950 -8.1% 49,560 57,100 15.2%
Profit after tax/(loss) 53,760 42,360 -21.2% 202,860 200,400 -1.2%
Net profit margin (%) 7.3% 4.8%   8.1% 6.0%  
No. of shares (m)         3,267  
Diluted earnings per share (Rs)*         61.3  
Price to earnings ratio (x)*         12.0  
*On a trailing 12 months basis

What has driven performance in FY12?
  • During FY12, segment wise sales from Refining (73% of revenues) and Petrochemicals (22.3% of revenues) booked an increase of 36.8% and 27.7% YoY respectively, both on account of better volumes and higher realizations. Despite higher realizations, Oil and Gas segmentís (4% of revenues) revenues were down by 25.2% due to fall in volumes and transfer of participatory interests in KG D6 basin which was to some extent compensated by higher oil and gas production from Panna Mukta fields. Average crude oil price realization improved to US$ 112/barrel for KG-D6 and US$ 115/barrel for Panna Mukta Tapti (US$ 86/barrel and US$ 86/barrel respectively in FY11). Similarly, gas price realization for the year came at US$ 5.73/ MMBTU (million metric British Thermal units) from Panna-Mukta, US$ 5.57/MMBTU from Tapti and US$ 4.20/MMBTU from KG-D6.

  • On margins front, the EBIT margins for Refining, Petrochemicals and Oil and Gas came at 3.3%(4.3% last year), 11.1% (14.7% last year) and 40.7%(38.8% last year).Despite higher gross refining margins (GRMs) at US$ 8.6 per barrel, the refining and Petrochemicals margins were down due to base effect. The Refining, Petrochemicals and Oil and Gas accounted for 40%, 38% and 22% of EBIT respectively.

  • The other income for FY12 more than doubled thus offsetting the decline at operating profit level to some extent. Despite a gain at pretax profit level, the net profits for the year declined due to higher effective tax rate in FY12.The net profits were down 1.2% YoY during FY12 with margins at 6.0% versus 8.1% last year.

    Segmental performance (Rs m)
    Refining (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Revenues 627,040 762,110 21.5% 2,154,310 2,947,340 36.8%
    EBIT 25,090 16,960 -32.4% 91,720 96,540 5.3%
    EBIT Margins (%) 4.0% 2.2%   4.3% 3.3%  
    Petrochemicals (Rs m)
    Revenues 181,940 214,120 17.7% 631,550 806,250 27.7%
    EBIT 26,260 21,740 -17.2% 93,050 89,670 -3.6%
    EBIT Margins (%) 14.4% 10.2%   14.7% 11.1%  
    Oil and Gas (Rs m)
    Revenues 41,040 26,090 -36.4% 172,500 128,980 -25.2%
    EBIT 15,690 9,510 -39.4% 67,000 52,500 -21.6%
    EBIT Margins (%) 38.2% 36.5%   38.8% 40.7%  

    Cost breakup
    (Rsm) 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw material costs 577,740 730,880 26.5% 1,914,550 2,753,830 43.8%
    as a% of sales 79.5% 85.8%   77.1% 83.5%  
    Staff costs 6,860 5,970 -13.0% 26,240 28,620 9.1%
    as a% of sales 0.9% 0.7%   1.1% 0.9%  
    Other expenses 43,710 49,340 12.9% 159,650 180,400 13.0%
    as a% of sales 6.0% 5.8%   6.4% 5.5%  
    Total expenses 628,310 786,190   2,100,440 2,962,850  

What to expect?
At a price of Rs 736, the stock is trading 11.1 times its trailing 12 months earnings per share (consolidated EPS). The company at net debt level has become debt free. For refining business, major chunk of the business, rising crude prices are a concern as they will put refining margins under pressure. Also, falling gas production and huge cash surplus remains an overhang.

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