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Reliance: Good numbers but...

Apr 27, 2005

Performance Summary
Reliance Industries has announced strong results for the fourth quarter and year ended March 2005. For FY05, while revenues have grown YoY by 28%, profits are up 47%, mainly on account of a slight margin expansion and higher other income. The fourth quarter was much more robust with the company clocking over 26% revenue and nearly 62% bottomline growth.

What is the company's business?
Reliance Industries is the country's largest private sector company having interests across the hydrocarbons value chain. The company, along with subsidiary, IPCL, controls over 70% of the country's domestic polymer capacity. Further, the acquisition of the German company, Trevira, by Reliance makes it the largest polyester manufacturer in the world. The company also has interests in the upstream petroleum sector, whereby it has participating interests in existing oil and gas fields, while it is likely to begin commercial production from its Krishna Godavari fields in 2007. It has recently ventured into fuel retailing with nearly 300 outlets.

Financial performance: A snapshot
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Sales 141,080 178,390 26.4% 518,020 660,510 27.5%
Expenditure 114,620 142,930 24.7% 418,180 532,390 27.3%
Operating profit (EBDITA) 26,460 35,460 34.0% 99,840 128,120 28.3%
Operating profit margin (%) 18.8% 19.9% 19.3% 19.4%
Other income 4,770 4,760 -0.2% 11,380 14,500 27.4%
Interest 3,490 3,620 3.7% 14,350 14,690 2.4%
Depreciation 9,680 9,810 1.3% 32,470 37,240 14.7%
Profit before tax 18,060 26,790 48.3% 64,400 90,690 40.8%
Extraordinary income/(expense) (320) - (1,390) -
Tax 3,550 3,870 9.0% 11,410 14,970 31.2%
Profit after tax/(loss) 14,190 22,920 61.5% 51,600 75,720 46.7%
Net profit margin (%) 10.1% 12.8% 10.0% 11.5%
No. of shares 1,393.4 1,393.4 1,393.4 1,393.4
Diluted earnings per share* (Rs) 40.7 65.8 37.0 54.3
P/E ratio (x) 10.1
(* annualised)

What has driven performance in FY05?
Robust pricing key to realizations:  During FY05, the company's gross revenues were up by about 30% YoY. Of this, 24% could be attributed to higher product prices, while the balance 6% is on account of higher volumes. Firm petrochemical and petroleum product prices in the international markets helped boost realizations. The company also witnessed a jump of 71% in export revenues. Although the company sells petroleum products to oil marketing PSUs in the domestic markets at a discount, higher prices on a YoY basis explains the growth in the topline.

Operating margins:  In 4QFY05, operating margins improved encouragingly (1.1%), while the improvement was marginal during FY05. The increase in margins during the March quarter could largely be attributed to a scale down in other expenditure head of the company. Raw material costs (forming over 85% of expenditure) increased by 2.5% during the quarter. However, for the said period, strong product prices helped the company enjoy gross refining margins at over US$ 8 per barrel, thereby negating the hike in raw material costs.

Expenditure table
(%) of sales 4QFY04 4QFY05 FY04 FY05
Consumption of raw materials 67.7% 70.2% 68.2% 70.3%
Staff cost 1.2% 1.5% 1.3% 1.3%
Other expenditure 12.4% 8.4% 11.2% 9.0%

Other income boost:  The bottomline growth of nearly 47% during FY05, is largely a result of higher other income component, which has grown by over 27% during the period. The other income boost was largely on account of income from preference shares. Also helping boost the bottomline were extraordinary expenses that were part of last year's financials. But for a marginal rise in interest outgo (due to foreign exchange differences) and depreciation during the year, the bottomline growth could have been better for the FY05 period.

What to expect?
At the current price of Rs 554, the stock is trading at a price to earnings multiple of 10.2 times FY05 earnings. The board of the company has recommended a final dividend of Rs 7.5 per share (dividend yield of 1.3%). The current petrochemicals uptrend has helped Reliance post record profits for eight consecutive quarters. Given the firm international demand on the back of no significant capacity addition, Reliance is likely to continue to maintain momentum in the medium term.

Also, refining margins are likely to remain robust in wake of high crude oil prices and growing demand for petroleum products. Infact, domestic demand for petroleum products increased by 4.8% in FY05, as compared to 3.5% last year.

Its retail foray is also going strong with product sales higher volumes per outlet as compared to the PSUs. Although the company has not made any significant breakthrough in the retail business, it is likely to continue to grow over the next couple of years. The company has approvals for setting up 5,849 retail outlets in India. The company's E&P business (oil and gas) is on track and the its telecom initiative (Reliance Infocomm) posted a profit of Rs 510 m in FY05, as against a loss of Rs 3.9 bn last year. All in all, the company is likely to continue on a higher growth trajectory during the medium term backed by its core business. However, the tussles in the top management are likely to have a bearing on investor sentiment till the issue is resolved.

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