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Reliance Industries: The Goliath stumbles - Views on News from Equitymaster
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Reliance Industries: The Goliath stumbles
Jul 24, 2009

Performance summary
  • Net sales decline by 23% YoY during 1QFY10, led by a fall in the company’s petrochemicals (down 22% YoY) and refining (down 23% YoY) businesses.
  • Operating margins expand by 3.8% YoY (to 18.5%). This is largely on account of lower raw material costs and other expenditure (as percentage of sales).
  • Gross refining margins stood at US$ 7.5 per barrel during the quarter, as compared to US$ 15.7 per barrel in 1QFY09.
  • Net profits fall by 12% YoY during the quarter. As compared to a 5% YoY drop in profits before tax, the decline in profits is higher on account of higher tax outgo. During the quarter, the company also witnessed higher depreciation and interest costs (as a percentage of sales). However, their impact was minimised due to the 211% YoY increase in other income.


Standalone financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Sales 415,790 320,550 -22.9%
Expenditure 354,580 261,340 -26.3%
Operating profit (EBDITA) 61,210 59,210 -3.3%
Operating profit margin (%) 14.7% 18.5%  
Other income 2,260 7,020 210.6%
Interest 2,940 3,450 17.3%
Depreciation 11,510 16,280 41.4%
Profit before tax 49,020 46,500 -5.1%
Tax 7,920 10,140 28.0%
Profit after tax/(loss) 41,100 36,360 -11.5%
Net profit margin (%) 9.9% 11.3%  
No. of shares (m)   1,573.9  
Diluted earnings per share (Rs)*   96.2  
P/E ratio (x)*   20.9  
* On a trailing 12-month basis

What has driven the performance in 1QFY10?
  • Reliance Industries (RIL) reported a 23% decline in net sales for 1QFY10 mainly on account of a decline in prices. Decline in prices accounted for 25% reduction in the topline, which was partially offset by 2% higher volumes.

  • RIL’s raw material costs declined by 2.5% (as a percentage of sales) during 1QFY10 on a YoY basis due to lower crude and naphtha prices. Other expenses declined by 1.4% (as a percentage of sales) due to lower conversion cost, selling expenses and exchange rate gain. The company’s EBITDA margin also benefited from a higher share of the upstream business and stronger petrochemical margins.

  • RIL commenced gas production from the KG D6 block during the quarter. KG D6 is amongst the five largest deepwater gas projects globally. During 1QFY10, the total production from KG D6 was 1,733 m standard cubic meters (MMSCM) of natural gas and 99,274 tonnes of crude oil. Currently, total gas production from KG D6 has ramped up to around 30 MMSCM per day. It is being supplied to 15 fertilizer, 15 power and 2 steel companies. Supply of nearly 5 MMSCM per day to 6 additional customers is expected to commence shortly.

  • Production from the Panna-Mukta block was 470 MMSCM of natural gas and 451,700 tonnes of crude oil, while it was 834 MMSCM of natural gas and 51,300 tonnes of condensate from the Tapti block.

  • RIL’s revenue for the refining and marketing segment decreased by 22.7% mainly due to high product prices driven by high crude oil prices during 1QFY09. The gross refining margin for 1QFY10 was at US$ 7.5 per barrel (bbl) as against US$ 15.7/bbl in 1QFY09.

    Refining Segment
    (Rs m) 1QFY09 1QFY10 Change
    Revenues 325,870 251,800 -22.7%
    EBIT 30,400 11,150 -63.3%
    EBIT margin 9.3% 4.4%  

  • In the Petrochemicals segment, domestic demand for most of the products remained strong during 1QFY10 with polymers demand higher by 19%, polyester by 3% while demand for fibre intermediates remained flat. There was a substantial improvement in overall petrochemicals margins as the industry was operating on low level of inventory leading to higher domestic realisations. The depreciation of rupee during the quarter on a YoY basis further improved product realisations and margins.

    Petrochemicals segment
    Results (Rs m) 1QFY09 1QFY10 Change
    Revenues 148,710 115,400 -22.4%
    EBIT 15,790 20,800 31.7%
    EBIT margin 10.6% 18.0%  

  • RIL’s capital expenditure for 1QFY10 was Rs 40 bn. The company’s outstanding debt as on 30th June 2009 was Rs 518 bn as compared to Rs 535 bn as on 31st March 2009. It has cash and cash equivalents of Rs 218 bn.

What to expect?
While RIL’s refining segment is currently witnessing margins pressure, it has a structural advantage vis-ŕ-vis other refiners on the back of superior product mix and complex refinery configuration. Hence, its GRMs will rebound faster compared to its peers going forward. On the petrochemical front, margins are going to reduce gradually with incremental capacities coming on stream in the Middle East region.

RIL’s investments in exploration and production (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 significantly to 14 blocks. There exists immense potential regarding further upside to the company’s current reserves.

At the current price of Rs 2,014 the stock is trading at a multiple of 21 times its standalone trailing 12 months earnings (including exceptional item).

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