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RIL: Realisations under pressure

Oct 4, 2001

Ever since the WTC attacks on September 11 the Reliance Industries Ltd. (RIL) scrip has fallen by 19.3%. Over the same period the BSE Sensex has declined by 12.6%. Although the counter was weakening prior to the attacks the volatility on the counter has increased. We commented on the scrip in the early part of the second quarter reckoning that the company's financial performance is likely to come under pressure in the current fiscal. This view was largely built on the weakening global petrochemical cycle, slowdown in domestic industry, increased competition in polymers and polyester intermediates and lower export earnings. However, for 1QFY02, the company positively surprised markets with a marginal drop in topline, maintaining operating margins and posting higher profits.

All the factors mentioned above continue to play on the company and many have intensified over the last three months. For 1QFY02, production of PFY declined by 2.1% while PSF production growth was buoyant at 9.9% for the same period. PSF and PFY contribute 17.1% of the turnover. Polymers have reported a sharper drop in production over the concerned period. HDPE production fell by 12.4%, PVC by 0.3% and LDPE by 4.9% on YoY basis.

The fall, yesterday, on the RIL counter seems to be driven by the continuing weakness in product prices released by RIL on Monday last. Month on month (MoM), polyester prices, PFY and PSF, have taken the biggest hit falling by 11.3% and 6% respectively. Although MEG prices have declined by 6.6%, PTA prices have held steady. This could connate an erosion in polyester business margins. With the festive season round the corner the move could be to boost sales. Polymer intermediate prices, MoM, have held steady.

2QFY02
QoQ YoY
POY -0.1%8.1%
PSF -1.0%-8.8%
PTA 0.4%-8.1%
MEG -2.4%-9.3%
PE 0.0%-12.4%
PP 0.6%-7.7%
PVC -10.3%-21.5%
PET -2.2%4.8%
LAB 0.0%1.1%
The scenario is more dismal for average quarter prices on a YoY basis. There has been a slide in prices across the major product slate. These products contribute an estimated 60% of gross sales while the rest is filled in largely by internal transfers. The share of these products in external sales will be even higher. A positive sign is the sharper decline in polymer and polyester intermediate prices, which could help the company sustain margins. But generating topline, operating profit and bottomline growth could remain challenging. A lot, however, also depends on how naphtha prices have moved during the quarter, which is largely driven by oil markets. The benefits, if any, from lower oil prices seen over the last fortnight are likely to accrue in the next quarter.

That said, the RIL scrip has bounced back from its 52-week low. The scrip has strong support at those levels (Rs 205 - Rs 210), as it marks an 18 month low. The counter is trading on a multiple of 10.7x 1QFY02 annualised earnings and 10.3x FY02E earnings. The stock, historically, has attracted an earnings multiple of 15x.

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