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RIL: Industry takes toll

Jul 31, 2002

As was expected, after Indian Petrochemicals Corporation Ltd. (IPCL) declared results over the weekend, turnover of Reliance Industries Ltd. (RIL) for 1QFY03 was likely to have come in lower than expected. The industry is likely to have suffered from lower offtake, which could have been impacted by the Gujarat riots. That said, RIL has just managed to grow topline for the concerned period.

(Rs m) 1QFY02 1QFY03 Change
Net sales 57,560 58,160 1.0%
Other Income 1,270 1,240 -2.4%
Expenditure 45,810 45,460 -0.8%
Operating Profit (EBDITA) 11,750 12,700 8.1%
Operating Profit Margin (%) 20.4% 21.8%  
Interest 2,570 2,250 -12.5%
Depreciation 3,960 3,840 -3.0%
Profit before Tax 6,490 7,850 21.0%
Tax 310 650 109.7%
Profit after Tax/(Loss) 6,180 7,200 16.5%
Net profit margin (%) 10.7% 12.4%  
No. of Shares (eoy) 1,053.8 1,053.8  
Diluted Earnings per share* 23.5 27.3  
P/E Ratio   9.0  

RIL, after experiencing decline in net sales for four consecutive quarters, arrested the slide in 4QFY02. Growth in net sales for the past two quarters has been salvaged by trading sales, which represent merchant exports for RPL's petroleum products. Adjusting for the same, net sales would have registered a marginal decline. As seen in IPCL, sales are likely to have been affected by reduced volumes. The company has reported lower sales of 1% YoY while production was higher by 2.5%, which is also indicated by an inventory build-up.

During the concerned quarter, realisation in polymers and polyester intermediates have improved both QoQ and YoY, which has allowed expansion in margins. Realisations are higher by an estimated 8%-10%. Naphtha prices are likely to have remained similar to last year's levels. However, higher production is likely to have led to increase in raw material costs. Interest costs of the company have been declining over the past six consecutive quarters. This is likely to have been achieved through re-financing of high cost debt.

On a consolidated basis, RIL has reported a 15.2% YoY growth in 1QFY03 profits. The group has indicated plans of undertaking a number of large projects. Reliance Infocom has planned a 60,000 kms pan-India optic fibre network offering the entire spectrum of voice, data & video services. As per reports, the group has invested Rs 30 bn in the project. Although, Reliance Petroleum Ltd. (RPL) has entered into a two year agreement with Indian Oil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) to evacuate an estimated 13 MMTPA of products, the company is likely to independently foray into retailing of transportation fuels. Consequently, the group could be a keen contender for BPCL or HPCL. Further, RIL plans to build its exploration & production (E&P) assets and is aiming to increase E&P contribution to an estimated 10% of sales. Inherently, E&P is a risky and capital intensive business.

At Rs 246 the scrip is trading on a multiple of 9x 1QFY03 annualised earnings. Valuations over the past year have fallen from 14x earnings to current levels. With the group re-entering an intensive expansion phase, the execution risks are likely to have increased leading to a not so compelling reason to enter the counter. On the other hand, the largest domestic fund, which has a substantial holding in group flagship, RIL, is reportedly reducing stake to meet liquidity requirements. Consequently, a supply overhang could be pulling down the counter. Having said that, with group risks being associated with RIL, consolidated earnings tend to reflect a better picture. On consolidated basis, the scrip is trading on a low multiple of 6.5x 1QFY03 annualised earnings.

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