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RIL: Consolidated numbers disappoint - Views on News from Equitymaster
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  • Oct 9, 2002

    RIL: Consolidated numbers disappoint

    The integrated petrochemical major, Reliance Industries (RIL), recently declared audited financial results for the year ended March '02. Post announcement the scrip has declined to Rs 240 levels after having clawed its way to Rs 270 levels in the previous month. The consolidated results have come in below street expectations. At time of unaudited results for FY02, the company declared consolidated profit at Rs 36.8 bn with per share earnings (EPS) at Rs 34.9.

    Based on these numbers, markets are likely to have expected audited EPS to be in proximity of unaudited figures. Having said that, unaudited consolidated results were based on equity accounting method (%share in performance of subsidiary & associate companies) with Reliance Petroleum being the largest contributor. With merger between RIL and RPL still pending approval from high courts, it was prudent for the company not to pre-empt the courts by declaring merged results, which has contributed to variance in numbers.

      Unaudited Audited  
    (Rs m) Con. FY02 Con. FY02 Change
    Net Sales 177,520 420,960 137.1%
    Other Income 4,750 8,320 75.2%
    Expenditure 130,380 342,310 162.5%
    Operating Profit (EBDIT) 47,140 78,650 66.8%
    Operating Profit Margin (%) 26.6% 18.7%  
    Interest 9,340 18,280 95.7%
    Depreciation 17,350 28,160 62.3%
    Profit before Tax 25,200 40,530 60.8%
    Extraordinary items 3,580 4,120 15.1%
    Tax 1,780 11,860 566.3%
    Income from assc./share of MI 9,780 (10)  
    Profit after Tax/(Loss) 36,780 32,800 -10.8%
    Net profit margin (%) 20.7% 7.8%  
    No. of Shares 1,053.8 1,396.4  
    Diluted Earnings per share* 34.9 23.5  
    P/E Ratio 6.9 10.3  

    At time of announcement of merger, based on 9m FY02 annualised results, we had reported a merged EPS of Rs 27.2. On merger, share capital of RIL has increased by 3.4 bn leading to dilution in EPS. Depreciation and tax has increased considerably pulling down consolidated earnings. Further, unaudited results also included associate companies, which have not been accounted for in audited results. Expected vehicle for power sector ventures, BSES -- an associate company -- added to the unaudited bottomline. Exclusion of associate companies from audited results has raised investors' eyebrows.

    The RIL scrips tends to trade in a valuation band of 10x-15x earnings. With the petrochemical cycle weakening the outlook for the company in FY03 remains challenging. Trailing 12 month average product prices for October '02 are lower across the board, except for polypropylene (PP) and poly vinyl chloride (PVC). Products prices have been weakening, month-on-month, for the past two months. However, average prices for quarter ended September '02 are higher YoY. Consequently, while volume growth could be subdued, realisations could offer buoyancy in sales for 2QFY03 petrochemical sales. In the refining business, we reckon, product prices YoY to have risen marginally, as crude prices for the concerned period were higher by 6%. But refining margins are likely to be have declined.

    International integrated majors, though having substantial oil & gas revenues, tend to trade on valuations between 15x-20x earnings, as diversification across the petroleum chain reduces volatility in earnings. RIL could trade at mid-cycle (petrochemical) valuations. However, with RIL likely to enter a capital intensive phase -- oil & gas exploration & production, roll out of petroleum marketing network, establishing pan-India broad band network and opportunities from privatisation -- and lack of clarity on the same, markets are cautious on the stock. The petrochemical and refining cycle is likely to remain weak for FY03.



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