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RIL: Higher refining margins save the day - Views on News from Equitymaster
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RIL: Higher refining margins save the day
Jul 27, 2011

Reliance Industries (RIL) announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported a 39.1% YoY and 16.7% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales increase by 39.1% YoY during the quarter.
  • Operating profits up 6.3% during the quarter. Operating margins were down 3.8% YoY.
  • Net income up 16.7% YoY. The net profit margins for the quarter declined by 1.3% YoY.
  • As per the company, the gas production from the KG-D6 block declined 18% to 156.2 billion cubic feet during the quarter. The oil production also dropped 41% to 1.41 million barrels.


Standalone financial snapshot
(Rsm) 1QFY11 1QFY12 Change
Net sales 582,280 810,180 39.1%
Expenditure 488,860 710,920 45.4%
Operating profit (EBDITA) 93,420 99,260 6.3%
EBDITA margin (%) 16.0% 12.3%  
Other income 7,220 10,780 49.3%
Interest 5,410 5,450 0.7%
Depreciation 34,850 31,950 -8.3%
Profit before tax 60,380 72,640 20.3%
Profit before tax margin (%) 10.4% 9.0%  
Tax 11,870 16,030 35.0%
Profit after tax/(loss) 48,510 56,610 16.7%
Net profit margin (%) 8.3% 7.0%  
No. of shares (m) 3274 3274  
Diluted earnings per share (Rs)*   64.5  
Price to earnings ratio (x)*   14  
*On a trailing 12 months basis

What has driven performance in 1QFY12?
  • The topline growth of 39.1% YoY for the quarter was mainly on account of robust growth in revenues from refining (up 45.8% YoY) and petrochem divisions (up 32.1% YoY). The topline got a further boost on account of gross refining margins (GRM) of US$10.3 per barrel (versus US$ 7.3 per barrel a year ago). This compared to Singapore GRMs of US$ 8.8 per barrel. However, the oil and gas segment registered a decline of 16.5% YoY.

  • The operating profits for the quarter witnessed a relatively weak growth of 6.3% (in comparison to the growth in topline). This was on account of 47.5% YoY increase in the cost of raw materials (up from 76.7% to 81.4% as a percentage of sales on a YoY basis).

    Cost break up
    (Rsm) 1QFY11 1QFY12 Change
    Raw material costs 446860 659,130 47.5%
    as a% of sales 76.7% 81.4%  
    Staff costs 6170 8,780 42.3%
    as a% of sales 1.1% 1.1%  
    Other expenses 35830 43,010 20.0%
    as a% of sales 6.2% 5.3%  
    Total expenses 488,860 710,920 45.4%
      84.0% 87.7%  

  • Segmentwise, operating profits for refining and petrochem segments witnessed an increase of 57% and 8% respectively on a YoY basis. The margins for refining segment stood at 4.3% during the quarter versus 4.0% last year. The petchem segment margin stood at 12.1% versus 14.8% a year before.

  • However, the operating profits declined by 23% for the oil and gas segment on account of decline in gas output from KG D6 basins. The margins for the segment stood at 38% versus 41% last year.

    Refining and marketing segment
    Rs m 1QFY11 1QFY12 Change
    Revenues 505,310 736,890 45.8%
    as a % of gross sales 73.0% 76.6%  
    EBIT 20,350 31,990 57.2%
    EBIT margins (%) 4.0% 4.3%  

    Petrochemicals segment
    Rs m 1QFY11 1QFY12 Change
    Revenues 139,030 183,660 32.1%
    as a % of gross sales 20.1% 19.1%  
    EBIT 20,530 22,150 7.9%
    EBIT margins (%) 14.8% 12.1%  

    Oil and Gas segment
    Rs m 1QFY11 1QFY12 Change
    Revenues 46,650 38,940 -16.5%
    as a % of gross sales 6.7% 4.0%  
    EBIT 19,210 14,730 -23.3%
    EBIT margins (%) 41.2% 37.8%  

  • The net profits for the quarter were up 17%. Besides a robust topline performance on account of higher refining margins, the bottomline was supported by 49% YoY increase in other income and 8% YoY decrease in depreciation charges.

What to expect?
At a price of Rs 871, the stock is trading 14 times its trailing 12 months earnings per share.

During the quarter, the decline in the gas production was offset by increase in refining margins. However, the growth from here on will hinge upon gas availability. The company said its shale gas JVs were progressing well. The company expects a stable growth in GRMs and the management is optimistic regarding margins in the petchem division. As far as deal with BP is concerned, it will take some time before the additional wells are drilled. While the company has performed well in refining segment and has managed decent growth in Petchem division, lack of clarity regarding gas supplies remains a concern.

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