Reliance Ind.: Weak GRMs drag bottomline

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 segment’s (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.