RIL: Can't escape cyclicality - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

RIL: Can't escape cyclicality

Jul 26, 2001

Since start of the calendar year the Reliance Industries Ltd (RIL) scrip has declined by 8.2%. Over the same period the benchmark index, Sensex, fell by 15.7 %. Over the past few weeks the stock has come under further pressure.The RIL scrip seems to be out of favour due to weakening of the petrochemical cycle. After the Asian crisis and global financial meltdown the cycle bottomed out in FY99 and staged a recovery over the next two years. However, the cycle has once again dipped (though not expected to drop to the same extent) with the global economy decelerating over the past seven months and engulfing most of the OECD nations (Organisation for Economic Co-operation & Development). This has led to softening of international commodity prices, including polyester & polymers, as demand slackens and inventories are built up.

Being signatories of the WTO, petrochemical import tariffs have been reducing over the past few years, which are to be reduced to WTO bound levels (basic import duty on polyester & polyester intermediates - 20%, polymer & polymer intermediates - 35%). Tariffs on polyesters are at WTO bound levels but polymers could witness further correction in import duties over the next few years. Having said that, the lower duties has increased the linkage between international and domestic petrochemical product prices and reduced the leeway available to domestic manufacturers to differ adjustment in prices. Consequently, domestic manufacturers could face pressure on realizations from lower international prices.

Added to that, the challenging international business environment, could impact exports (sales volumes) of domestic manufacturers. Manufactured exports, reported by RIL, in FY01 stood at Rs 29.6 bn ($635 m), which represents 11.5% of sales adjusted for merchant exports. RIL has reported exports of Rs 7.5 bn in 1QFY02, which is 9.9% lower compared to the same period of the previous fiscal (FY01 - Rs 8.3 bn). In dollar terms the decline is even lower considering the depreciation of the rupee. Decline in dollar terms is estimated to be 14.2%.

Utilisation rates
 1QFY02
Plastics110%
Polyester 95%
Fibre Int.*105%
Aggregate103%
* Fibre Intermediates
Domestic sales of RIL, consequently, represent 88.5% of turnover. On the domestic front too brakes have been applied on economic growth momentum. As per the Central Statistical Organisation (CSO) revised estimates, GDP growth in FY01 was 5.2% as compared to the earlier projections of 5.8%. Much of this slowdown was witnessed in 4QFY01, which has resulted in the malaise spilling into the new fiscal and a recovery expected only in the second half of FY02. In fact, as per recent reports, core sector growth (six key infrastructure industries) slipped to 1% for 1QFY02 compared to 9.3% in 1QFY01. The lower growth could weigh down on domestic demand leading to challenging operating environment for realizing volume growth. Interestingly, RIL has reported a 7% rise in production for 1QFY02 from 2.6 MMTPA (m metric tonnes per annum) to 2.8 MMTPA. The company operated above full capacity at 103% for the concerned period.

Adding to the pressure on volume growth, RIL has reported a drop in market share for polymers and polyester intermediates. The stabilization of operations at Haldia Petrochemicals Ltd. and the subsequent filling up of capacity could have eaten into the polymer market share, especially in the Eastern region. Competition in polyester intermediates, PTA (purified terephthalic acid), has intensified with the Mitsubishi plant ramping up utilization rates.

The increase in supply from new players and a corresponding softening in domestic demand has lead to an imbalance in the demand - supply situation. Domestic petrochemical prices, which are closely linked to the demand - supply variable, are facing downward pressure.

Corroborating this view is the performance reported by IPCL for 1QFY02. Sales for the concerned quarter rose marginally by 3% YoY, while the net profit dipped by 64.2% in this period. This could reflect significant pressure on the operating margins. The company has stated weakness in domestic and international product prices (polymers contributed approximately 72.4% to IPCL's topline). Adding to the woes, are the higher feedstock prices including naphtha, due to firm crude oil markets. All these factors portend a gloomy picture for RIL's revenues and operating margins in FY02.

The RIL scrip has been declining since the end of May '01 from a high of Rs 404. Technically, also the counter is looking weak with support at Rs 290. Breaking this level the stock has a sharp drop in support levels in the region of Rs 200. Not adjusting for foreign exchange gains in FY01 we have estimated operating profits to decline by 5.8% and PAT by 5%. However, factoring a swing in the cycle from FY02 onwards the company seems to enjoy significant earnings growth with strong cash flows.

Equitymaster requests your view! Post a comment on "RIL: Can't escape cyclicality". Click here!

  

More Views on News

5 Indian Companies that are Leading the Green Hydrogen Revolution (Views On News)

Nov 2, 2021

As the green energy movement grows, Indian companies are on a mission to adopt green hydrogen, the cleanest form of energy in the world.

RELIANCE IND. Announces Quarterly Results (2QFY22); Net Profit Up 47.1% (Quarterly Result Update)

Oct 26, 2021 | Updated on Oct 26, 2021

For the quarter ended September 2021, RELIANCE IND. has posted a net profit of Rs 154 bn (up 47.1% YoY). Sales on the other hand came in at Rs 1,741 bn (up 49.8% YoY). Read on for a complete analysis of RELIANCE IND.'s quarterly results.

RELIANCE IND. 2020-21 Annual Report Analysis (Annual Result Update)

Oct 18, 2021 | Updated on Oct 18, 2021

Here's an analysis of the annual report of RELIANCE IND. for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of RELIANCE IND.. Also includes updates on the valuation of RELIANCE IND..

RELIANCE IND. Announces Quarterly Results (1QFY22); Net Profit Up 7.1% (Quarterly Result Update)

Jul 26, 2021 | Updated on Jul 26, 2021

For the quarter ended June 2021, RELIANCE IND. has posted a net profit of Rs 138 bn (up 7.1% YoY). Sales on the other hand came in at Rs 1,444 bn (up 58.2% YoY). Read on for a complete analysis of RELIANCE IND.'s quarterly results.

RELIANCE IND. 2020-21 Annual Report Analysis (Annual Result Update)

Jul 8, 2021 | Updated on Jul 8, 2021

Here's an analysis of the annual report of RELIANCE IND. for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of RELIANCE IND.. Also includes updates on the valuation of RELIANCE IND..

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

RELIANCE IND. SHARE PRICE


Nov 30, 2021 (Close)

TRACK RELIANCE IND.

  • Track your investment in RELIANCE IND. with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

RELIANCE IND. 8-QTR ANALYSIS

COMPARE RELIANCE IND. WITH

MARKET STATS