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Reliance Ind. FY06 results: Our view - Views on News from Equitymaster

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Reliance Ind. FY06 results: Our view
Apr 27, 2006

Performance summary
Reliance Industries has announced mixed results for the fourth quarter and year ended March 2006. For FY06, the company has registered a topline growth of 23% YoY. However, contraction in operating margins combined with substantially lower other income has led to the net profit growth trail the growth in topline. The performance has been almost similar for the fourth quarter.

Financial snapshot…
(Rs. m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 178,390 245,420 37.6% 660,510 812,110 23.0%
Expenditure 142,930 204,960 43.4% 532,390 669,120 25.7%
Operating profit(EBDITA) 35,460 40,460 14.1% 128,120 142,990 11.6%
EBDITA margins(%) 19.9% 16.5%   19.4% 17.6%  
Other income 4,760 870 -81.7% 14,500 6,830 -52.9%
Interest expenses 3,620 2,250 -37.8% 14,690 8,770 -40.3%
Depreciation 9,810 9,820 0.1% 37,240 34,010 -8.7%
Profit before tax 26,790 29,260 9.2% 90,690 107,040 18.0%
Tax 3,870 4,240 9.6% 14,970 16,350 9.2%
Profit after Tax 22,920 25,020 9.2% 75,720 90,690 19.8%
Net profit margin(%) 12.8% 10.2%   11.5% 11.2%  
No.of shares(m) 1,394 1,394   1,394 1,394  
Diluted earnings per share 16.4 18.0   54.3 65.1  
Price to earning ratio.         15.3  

What is the company’s business?
Reliance Industries (RIL) is the country’s largest private sector company having interests across the hydrocarbons value chain. The company has a 26% share of the total refining capacity in India and along with its subsidiary, IPCL, controls over 70% of the country’s domestic polymer capacity. RIL has also ventured into the upstream sector, whereby it has participating interests in existing oil and gas fields. The company also has a presence in the downstream segment and has commissioned 1,218 outlets out of permitted 5,849 outlets.

What has driven performance in FY06?
Robust topline growth: RIL has registered a 23% YoY growth in topline during the fiscal, aided by a 1% YoY increase in sales volumes and 22% YoY improvement in average realizations. The company also benefited from increased capacity utilizations and processed around 30.5 m tonnes (MT) of crude during FY06. Apart from the domestic growth, topline was also aided by a 6% YoY growth in exports. As a matter of fact, the company exported 10.8 MT of products during the year, compared to 10.2 MT exports during FY05. Out of the 10.8 MT of total exports, HSD and gasoline contributed 54% and 20% respectively. Notably, the company has achieved a HSD retail market share of 13% within a year in the retailing of transportation fuels.

Higher input costs dent margins: Despite the strong growth in topline during FY06, RIL reported a margin contraction. Operating margins declined by 1.8% during the fiscal. The reason attributable to the decline in operating margins is increase in cost of raw material over the period. Cost of raw material increased from 70% of sales in FY05 to just about 72% of sales in FY06. The rise in other expenditure, from 9% of FY05 sales to 12% in FY06, also impacted operating margins during the fiscal. The company’s Jamnagar refinery, however, recorded its highest ever gross refining margins (GRMs) of US$ 10.3 per barrel. For the petrochemicals segment, margins increased to 14.4% in FY06 from 12.7% in the previous year. For the refining segment, however, margins contracted to 8.3%, from 10.7% in FY05.

Expenditure break up…
As a % of net sales 4QFY05 4QFY06 FY05 FY06
(Increase)/decrease in cost 2.5% 3.9% 0.8% -2.6%
Consumption of raw material 67.7% 66.1% 69.5% 71.8%
Staff Cost 1.5% 0.9% 1.3% 1.2%
Other expenditure 8.4% 12.6% 9.0% 12.0%
Total expenditure as % net sales 80.1% 83.5% 80.6% 82.4%

Bottomline: The impact of operating margin contraction was seen in the net profit growth underperforming growth in the topline for both the fourth quarter and the fiscal. Decline in the other income component aggravated the situation. The bottomline performance would have been worse but for a decline in interest and depreciation charges.

Performance in the recent past…
(Rs m) 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06
Sales growth(%, YoY) 42.1% 26.45% 24.5% 28.2% 2.3% 37.6%
Operating profit margins 18.5% 19.9% 20.1% 17.9% 16.4% 16.5%
Net profit margins 11.8% 12.8% 13.0% 12.0% 9.8% 10.2%
Net profit growth(YoY)   61.5% 60.8% 41.6% -15.1% 9.2%

What to expect?
At the current price of Rs 996, the stock is trading at a price to earnings multiple of 15.3 times its FY06 earnings. The board has recommended a divided of Rs 10 per share (dividend yield of 1%). Much akin to the performance of its subsidiary, IPCL, RIL has also felt the heat of increasing input cost on the petrochemical segment. While the company has achieved record margins (US$ 10.3 per barrel) during the fiscal, we believe that considering the capabilities and complexities of its refining capacity, the company is likely to register strong refining margins going forward as well. In the retail segment, while RIL operates just over 1,200 outlets currently, the plans are to move towards the limit of 5,849 retail outlets. This move shall further enhance the company’s presence across the energy value chain.

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