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Reliance: And the 'story' continues

Jul 27, 2004

Introduction to results
Reliance Industries has declared its 1QFY05 results today. The performance can be attributed largely to the uptrend in the petrochemicals cycle and firm petroleum product prices, which have resulted in high refining margins.

(Rs m) 1QFY04 1QFY05 Change
Net sales 125,010 142,800 14.2%
Other income 1,870 3,470 85.6%
Expenditure 102,130 114,750 12.4%
Operating profit (EBDITA) 22,880 28,050 22.6%
Operating profit margin (%) 18.3% 19.6%  
Interest 3,490 4,680 34.1%
Depreciation 7,000 9,160 30.9%
Profit before tax 14,260 17,680 24.0%
Tax 2,460 3,310 34.6%
Extraordinary items 760 -  
Profit after tax/(loss) 11,040 14,370 30.2%
Net profit margin (%) 8.8% 10.1%  
No. of shares (m) 1,396.0 1,396.0  
Diluted earnings per share (Rs)* 31.6 41.2  
P/E ratio (x)   11.4  
(* annualised)      

What is the company's business?
Reliance Industries has a presence in the entire hydrocarbons value chain ranging from upstream (exploration and production), downstream (refining and marketing), petrochemicals and textiles businesses. A further segmental breakup shows that the petrochemicals business contributes nearly 39% of the EBIT margins while refining contributes nearly 49%. The exploration business contributes nearly 12%, while the balance is contributed by the textiles business. Going forward, we believe the share of upstream business is likely to increase.

What has driven performance in 1QFY05?
Sales: The topline growth of 14% YoY is a combination of improved volumes and better realizations. Continuing uptrend in the petrochemicals cycle coupled with high petroleum product prices have resulted in better realizations for the company. We believe this uptrend in the petrochemicals cycle is likely to continue for another year and the company's venture into marketing of petrol and diesel would add to the margins, going forward.

Expenditure break-up
(%) of sales 1QFY04 1QFY05
Raw materials consumed 70.5% 68.0%
Staff cost 1.3% 1.2%
Other expenditure 9.9% 11.1%

Operating margins: Margins have improved by 130 basis points largely being a trickle down effect of robust prices and also the fact that expenditure has not increased proportionately in comparison to revenues. The company has been successful in controlling its raw materials cost which account for nearly 70% of the total expenditure. However, the operating profits could have been better but for the rise in other expenditure.

Net profit: The bottomline has improved by an impressive 30% YoY despite a 34% rise in interest expenditure and 31% rise in depreciation on account of revaluation of plant and machinery. This growth can be attributed to the extraordinary expenditure (VRS) that the company has accounted for during the 1QFY04.

Over the last four quarters: The company has posted steady growth in bottomline over the last four quarters. The growth in operating profit is lower during the last quarter due to an increase in raw materials expenditure. However, it is to be noted that although operating profits peaked during 4QFY04, sales during the period dipped. Better refining margins was the key reason behind the same.

What to expect?
The stock is currently trading at a P/E multiple of 11x 1QFY05 annualised earnings. Going forward, we believe the company shall ride high on exploration business, which begins commercial operations in FY06. Also the uptrend in the petrochemicals cycle is likely to continue for another year. Also, with the acquisition of a German polyester firm, Reliance has become the largest polyester manufacturer in the world and this acquisition augurs well for the company as it marks the company's entry into the European markets. However, the marketing business remains a worry as the company might witness competition from the assets rich PSUs in the business.


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