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Reliance Industries: Uncertainties abound - Views on News from Equitymaster
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Reliance Industries: Uncertainties abound
Apr 26, 2011

Reliance Industries Ltd. (RIL) announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company has reported a 26% YoY and 14% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales increase by 26% YoY during the quarter. For FY2011, net sales registered an increase of 29% YoY.
  • Operating margins were down by 2.4% YoY during the quarter. For FY11, the decline in margins was relatively modest at 0.5% YoY.
  • Net profits grew by 14% YoY. For FY2011, net income registered an increase of 25% YoY.

Standalone financial snapshot
(Rsm) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 575,700 726,740 26.2% 1,924,610 2481700 28.9%
Expenditure 484,340 628,310 29.7% 1,618,800 2,100,440 29.8%
Operating profit (EBDITA) 91,360 98,430 7.7% 305,810 381,260 24.7%
EBDITA margin (%) 15.9% 13.5%   15.9% 15.4%  
Other income 6,150 9,170 49.1% 24,600 30,520 24.1%
Interest 5,250 6,960 32.6% 19,970 23,280 16.6%
Depreciation 33,920 33,870 -0.1% 104,970 136,080 29.6%
Profit before tax 58,340 66,770 14.4% 205,470 252,420 22.9%
Profit before tax margin (%) 10.1% 9.2%   10.7% 10.2%  
Tax 11,240 13,010 15.7% 43,110 49,560 15.0%
Profit after tax/(loss) 47,100 53,760 14.1% 162,360 202,860 24.9%
Net profit margin (%) 8.2% 7.4%   8.4% 8.2%  
No. of shares (m)         3,278  
Diluted earnings per share (Rs)*         62.0  
Price to earnings ratio (x)*         16.3  

What has driven performance in 4QFY11?
  • The topline growth of 26.2% YoY for the quarter was mainly driven by 22% YoY growth (on a gross basis) in revenues from Refining segment (74% of the gross sales).The revenues from Petrochemicals segment (21% of gross sales) were up by 18% YoY. However, Oil and Gas segment (5% of the gross sales) revenues declined by 5% YoY. For FY11, the gross revenues registered an increase of 32% YoY, 14% YoY and 36.4% YoY for the Refining, Petrochemicals and Oil and Gas segment respectively, leading to an overall annual growth of 29% in net sales.

  • The company registered 8% YoY increase in operating profits that translated into a margin of 14% for the quarter (16% in 4QFY10). Segmentwise, the EBIT margins came at 4%, 14% and 38% for Refining, Petrochemicals and Oil and gas segments respectively. While Petrochemicals and Refining segment margins remained the same as that of 4QFY10, the operating profits for Oil and Gas segment were down by 8% YoY leading to margin decline of 1.2% for the segment. For FY11, the operating profits registered an increase for all the three segments. However, the overall profit margins declined marginally on a YoY basis - Petrochemicals (14.7% vs. 15.5%), Refining (4.3% vs. 3.7%), Oil and Gas (38.8% vs.42.8%).

  • In the Refining segment, RIL processed 16.7 m tonnes of crude reflecting a utilization rate of 108%, much higher than global average rates. The cracks for gasoil improved on account of robust demand from China and planned shutdowns. The gasoline cracks also improved on account of increased sales of personal vehicles in developing Asia. However, naphtha cracks for the quarter weakened due to cracker maintenance and earthquake in Japan. The EBIT margins declined for the quarter to 4% from 4.6% in 3QFY11 due to shut down of fluid catalytic cracker in domestic tariff area refinery for 46 days

  • For FY11, the Refining division segment revenue grew by 32% YoY. This was driven by a 12% YoY increase in volumes and 20% YoY increase in prices. RIL processed 66.6 m tonnes of crude for the year, the highest ever for RIL. The exports from the segment witnessed 40% YoY growth due to increase in volumes from SEZ refinery. The EBIT margin for the segment came at 4.3%, up 0.5% YoY on the back of better refining margins.

  • The gross refining margins (GRMs) stood at US$ 9.2 per barrel during the quarter (US$ 7.5 per barrel during 4Q2010). For FY2011, the GRMs stood at US$ 8.4 per barrel (US$ 6.6 per barrel during FY2010). The GRMs were higher for the year due to improvement in middle distillate cracks and wider light heavy differential. However, the YoY recovery in RILís quarterly GRMs was significantly lower than the recovery in Singapore complex refining margins.

    Refining and marketing segment
    Rs m 4QFY10 4QFY11 Change FY10 FY11 Change
    Revenues 512,500 627,040 22.3% 1,632,490 2,154,310 32.0%
    † as a % of gross sales 72.0% 73.6%   70.5% 72.7%  
    EBIT 19,860 25,090 26.3% 60,110 91,720 52.6%
    EBIT margins (%) 3.9% 4.0%   3.7% 4.3%  

  • In Petrochemicals segment, RIL recorded its highest ever EBIT on back of strong domestic demand. The revenues were up by 18% YoY during the quarter driven by higher prices. The EBIT was up by 18% and 8% (YoY) for the quarter and full year respectively. However, the margins for the quarter remained almost same due to base effect of higher revenues. For FY11, of the 14% YoY growth in the segment revenues, volumes and price growth contributed to 1% and 13% growth respectively.

    Petrochemicals segment
    Rs m 4QFY10 4QFY11 Change FY10 FY11 Change
    Revenues 154,480 181,940 17.8% 552,510 631,550 14.3%
    as a % of gross sales 21.7% 21.4%   23.9% 21.3%  
    EBIT 22,220 26,260 18.2% 85,810 93,050 8.4%
    EBIT margins (%) 14.4% 14.4%   15.5% 14.7%  

  • In the oil & gas (exploration & production) business, the company registered a 5% and 7.8% decline (YoY) in revenues and operating profits. However, for FY10, the revenues and operating profits of the segment were up by 36% and 24% respectively. The growth in segment revenues for the full year due to higher quantities of oil, gas and condensate production from KG-D6 basin was offset by lower production from Panna, Mukta and Tapti fields.

    Oil and Gas segment
    Rs m 4QFY10 4QFY11 Change FY10 FY11 Change
    Revenues 43,180 41,040 -5.0% 126,490 172,500 36.4%
    as a % of gross sales 6.1% 4.8%   5.5% 5.8%  
    EBIT 17,020 15,690 -7.8% 54,130 67,000 23.8%
    EBIT margins (%) 39.4% 38.2%   42.8% 38.8%  

What to expect?
While the improvement in gross margins and investment in shale gas ventures is positive for the company, supply issues from its oil and gas fields remain an overhang. We expect Petrochemicals division performance to remain robust on account of increase in the demand.

At the current price of Rs 1,009, the stock is trading 16.3 times its trailing 12 months standalone earnings versus an Industry PE of 19.0.Going forward, the performance will depend on the gross refining margins. A lot will also depend on how RIL plans to use its cash reserves that are almost double of the levels seen last year.

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