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Reliance Industries: Margin pressure - Views on News from Equitymaster

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Reliance Industries: Margin pressure
Jul 24, 2008

Performance summary
  • Topline increases by 41% YoY during 1QFY09.

  • EBITDA margins decline to 14.7% in 1QFY09 down from 19.2% in 1QFY08.

  • Other income grows by 15% YoY during 1QFY09.

  • Bottomline registers a growth of 13.2% YoY during 1QFY08 on the back of topline growth and higher other income.



Standalone financial snapshot

(Rs m) 1QFY08 1QFY09 Change
Net sales 295,240 415,790 40.8%
Expenditure 238,510 354,580 48.7%
Operating profit (EBDITA) 56,730 61,210 7.9%
EBDITA margin (%) 19.2% 14.7%
Other income 1,970 2,260 14.7%
Interest 2,950 2,940 -0.3%
Depreciation 11,250 11,510 2.3%
Profit before tax 44,500 49,020 10.2%
Tax 8,200 7,920 -3.4%
Profit after tax/(loss) 36,300 41,100 13.2%
Net profit margin (%) 12.3% 9.9%
No. of shares (m) 1,393.5 1,453.6
Diluted earnings per share (Rs)* 137.2
Price to earnings ratio (x)* 15.6
* On trailing twelve months basis

What has driven the performance in 1QFY09?
  • Growth in the topline during 1QFY09 was mainly on account of prices. Exports zoomed higher by 112% during the quarter.

    • RILís Jamnagar refinery processed 8.13 m tonnes of crude in 1QFY09, an utilisation rate of 98.5% as compared to 8.01 m tonnes during 1QFY08. Its utilisation rate was superior to the average refinery utilisation of 85.6% in North America, 83.7% in Europe and 83.5% in the Asia-Pacific region.

    • Revenues for the refining & marketing segment during 1QFY09 increased by 46% mainly due to high product prices driven by high crude oil prices. Increase in prices accounted for 41% of growth in revenue while higher volumes accounted for 5%. Exports of refined products were at US$ 5.7 b. This accounted for 5.3 m tonnes of product volume as compared to 5 m tonnes during 1QFY08.

    • The company managed to sustain its margins in the segment primarily on the back of efficient sourcing of crude oil, ability to produce globally accepted products and flexibility in its crude bucket, product slate and evacuation infrastructure.

      Refining Segment
      (Rs m) 1QFY08 1QFY09 Change
      Revenues 223,280 325,870 45.9%
      EBIT 25,570 30,400 18.9%
      EBIT margin 11.5% 9.3%

    • Production of petrochemical products increased from 4.8 m tonnes to 5.0 m tonnes during 1QFY09, an increase of 4%.

      Petrochemicals segment
      Results (Rs m) 4QFY07 4QFY08 Change
      Revenues 132,130 148,710 12.5%
      EBIT 18,450 15,790 -14.4%
      EBIT margin 14.0% 10.6%

    • Consumption of raw materials increased by 75% during 1QFY09 mainly on account of higher crude and naphtha prices. Traded goods purchased decreased from Rs. 8.4 bn to Rs. 6 bn following the reduction in retail marketing of transportation fuels.

      Cost break-up
      (Rs m) 1QFY08 1QFY09 Change
      Raw materials 205,550 315,100 53.3%
      % sales 69.6% 75.8%
      Staff cost 3,710 6,510 75.5%
      % sales 1.3% 1.6%
      Other expenditure 19,530 32,970 68.8%
      % sales 6.6% 7.9%
      Total cost 228,790 354,580 55.0%
      % sales 77.5% 85.3%

    • The companyís retail business-Reliance Retail now operates over 735 stores in 70 cities with over 3.5 million square feet of trading space through 12 distinct store formats. During 1QFY09, Reliance Retail entered into joint venture with Office Depot for office solution products.

    • The capital expenditure during 1QFY09 was Rs. 72 bn, primarily in the oil and gas business.

    What to expect?
    RILís refining segment is expected to deliver robust GRMs going forward, on the back of superior product mix and complex refinery configuration. On the petrochemical front, margins are going to reduce gradually with incremental capacities coming on stream in the Middle East region. However with lower per capita consumption in the domestic markets coupled with a booming economy, higher volumes are going to propel the petrochemical EBIT.

    RILís investments in E&P, organised retail and development of special economic zones (SEZs) will all be the cornerstones for future growth. In the E&P segment, it has expanded its international E&P footprint to Kurdistan, Oman, Yemen and Columbia. There exists immense potential regarding further upside to the companyís current reserves. However, lack of clarity regarding the size of potential reserves along with issue in commercialisation of the large-scale CBM blocks make valuations difficult.

    At the current price of Rs 2,143 the stock is trading at a multiple of 15.6 times its standalone trailing 12 months earnings. While we believe focus has now significantly shifted to execution of the new ventures, RIL has a proven track record and superior execution capabilities. Hence, we hold a positive view on the stock, especially after the recent correction.

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