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Reliance Industries: Refining boosts bottomline - Views on News from Equitymaster
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Reliance Industries: Refining boosts bottomline
Jul 28, 2010

Reliance Industries has announced its 1QFY11 results. The company has reported 87% YoY and 32% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales increase by 87% YoY during 1QFY11, led by a 107% growth in the company’s refining business. Revenues from the petrochemical and exploration businesses grow by 19% YoY and 150% YoY respectively.
  • Operating margins decline by 4.5% YoY to 16%. This is largely on account of higher raw material costs (as a percentage of sales).
  • Gross refining margins stood at US$ 7.3 per barrel during the quarter, as compared to US$ 6.8 per barrel in 1QFY10.
  • Net profits grow by 32% YoY during the quarter on the back of topline growth despite lower margins and higher depreciation and interest cost.


Standalone financial snapshot
(Rs m) 1QFY10 1QFY11 Change
Net sales 311,870 582,280 86.7%
Expenditure 248,030 488,860 97.1%
Operating profit (EBDITA) 63,840 93,420 46.3%
EBDITA margin (%) 20.5% 16.0%  
Other income 7,090 7,220 1.8%
Interest 4,600 5,410 17.6%
Depreciation 18,780 34,850 85.6%
Profit before tax 47,550 60,380 27.0%
Tax 10,890 11,870 9.0%
Profit after tax/(loss) 36,660 48,510 32.3%
Net profit margin (%) 11.8% 8.3%  
No. of shares (m)   3,271  
Diluted earnings per share (Rs)*   53.3  
Price to earnings ratio (x)*   20  

What has driven performance in 1QFY11?
  • Reliance Industries posted a topline growth of 87% YoY during 1QFY11 led by a 107% growth in the company’s refining business. Revenues from the petrochemical business grew by 19% YoY, while the exploration and production business grew by 150% YoY during the quarter.

  • In the oil & gas (exploration & production) business, the company achieved higher earnings before interest and taxes (EBIT) on account of the production from KG D6 fields. During the quarter the company produced 304,349 tonnes of crude oil and 5,376 m standard cubic meters (MMSCM) of natural gas from the fields. In addition, it produced 502 MMSCM and 785 MMSCM of natural gas from Panna-Mukta and Tapti fields respectively.

    Exploration and production Segment
    (Rs m) 1QFY10 1QFY11 Change
    Revenues 18,640 46,650 150.3%
    EBIT 10,080 19,210 90.6%
    EBIT margin 54.1% 41.2%  

  • The company’s refineries achieved an utilisation rate of 109% during the quarter. Gross refining margins stood at US$ 7.3 per barrel during 1QFY11, as compared to US$ 6.8 per barrel in 1QFY10. Refining margins in the US and Europe remained firm due to renewed optimism of economic recovery. However, Singapore complex margins declined on account of lower gasoline and fuel oil cracks which offset the higher cracks in distillate products. Reliance Industries’ premium over Singapore complex margin widened primarily due to efficient global sourcing of crude and higher light-heavy differential.

    Refining segment
    (Rs m) 1QFY10 1QFY11 Change
    Revenues 244,340 505,310 106.8%
    EBIT 12,990 20,350 56.7%
    EBIT margin 5.3% 4.0%  

  • In the petrochemicals segment, increase in volume accounted for 8.8% growth in revenue while higher prices accounted for 10% increase in revenue. EBIT margins declined on account of incremental polypropylene production from Jamnagar SEZ which witnessed significant margin reduction over propylene.

    Petrochemicals segment
    Results (Rs m) 1QFY10 1QFY11 Change
    Revenues 117,070 139,030 18.8%
    EBIT 21,090 20,530 -2.7%
    EBIT margin 18.0% 14.8%  

  • During 1QFY11, the Supreme Court delivered its judgment in the company’s legal dispute with RNRL. Subsequently, Reliance Industries and the Reliance ADA group companies approved and signed an agreement canceling all existing non-compete arrangements. They also signed a entered into a new simpler non-compete agreement with respect to only gas-based power generation.

  • Reliance Industries entered into a joint venture (JV) with US based Atlas Energy under which it has acquired a 40% interest in Atlas's core Marcellus Shale acreage position. It has also entered into a JV with US based Pioneer Natural Resources Company under which it has acquired 45% interest in Pioneer's core Eagle Ford Shale acreage position.

  • The company has signed a memorandum of understanding with Russian petrochemical major SIBUR to set up a JV in India. The JV will produce butyl rubber at Jamnagar.

  • Reliance Industries holds 95% of the equity in Infotel Broadband Services, which has emerged as a successful bidder in all the 22 circles of the auction for broadband wireless access spectrum conducted by the department of telecom.

What to expect?
While RIL’s refining segment is off its record gross refining margins, 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 and organised retail will be the cornerstones for future growth. In the E&P segment, it has expanded its international E&P footprint significantly to 14 blocks. It has also acquired a 40% interest in Atlas's Marcellus Shale acreage and 45% interest in Pioneer’s Eagle Ford Shale acreage position. There exists immense potential regarding further upside to the company’s current reserves.

At the current price of Rs 1,045 the stock is trading at a multiple of 20 times its standalone FY10 earnings. While the stock is still off its all time highs, issues like complex group structure and inadequate disclosure in areas like segment wise sales and cost break up make assessment of its intrinsic value a difficult task.

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