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Reliance: Refined play

Oct 16, 2003

Reliance Industries Limited has announced its September quarter results reporting 10% and 26% growth in its topline and bottomline, respectively. Operating margins also improved by about 70 basis points. The key reasons for the improvement in topline and operating margins can be attributed to the increased selling prices of its products and stability in feedstock prices, respectively.

(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Net sales 115,190 126,930 10.2% 221,690 251,940 13.6%
Other Income 2,040 2,510 23.0% 4,050 4,380 8.1%
Expenditure 93,660 102,310 9.2% 179,640 204,440 13.8%
Operating Profit (EBDITA) 21,530 24,620 14.4% 42,050 47,500 13.0%
Operating Profit Margin (%)18.7%19.4%19.0%18.9%
Interest 4,130 3,510 -15.0% 8,200 7,000 -14.6%
Depreciation 6,570 7,780 18.4% 13,030 14,780 13.4%
Profit before Tax12,87015,84023.1%24,87030,10021.0%
Tax 2,850 2,900 1.8% 5,670 5,360 -5.5%
Extraordinary expenses - 310 - 1,070
Profit after Tax/(Loss) 10,020 12,630 26.0% 19,200 23,670 23.3%
Net profit margin (%)8.7%10.0%8.7%9.4%
No. of Shares 1,396.0 1,396.0 1,396.0 1,396.0
Diluted Earnings per share*28.736.227.533.9
P/E Ratio13.314.2
*(annualised)

Another factor contributing to the improvement in operating margins was the relatively control over operating expenditure. Just to put things in perspective, raw material expenditure as a percentage of net sales came down to 68% in 2QFY04 from 72% in the corresponding period last year. Similarly, staff costs were kept under check at 1.3% of net sales. However, the other expenditure component, which grew 23% in absolute terms, was a dampener for the operating margins. Lower interest costs also contributed to the 26% rise in bottomline.

For the half-year ended September 2003, the bottomline improved by 23% on the back of a 14% improvement in topline. It must be noted that during the first half of the current fiscal, the company managed to increase its exports by 41% and this is despite the rupee appreciation. However, operating margins during this period have fallen by a marginal 10 basis points, which is primarily due to a fall in the realisations in the petrochemicals segment during 1QFY04.

It must be noted that it is the firm refining margins that have been playing an important role in protecting the bottomline of the company. In contrast to 1QFY04, the margins of the petrochemicals segment have stabilised. The effect of lower product prices during the June quarter has affected the margins of the segment for the first half of the current fiscal. However, with product prices now stabilising and realisations improving, its contribution towards the second half could be expected to improve. On the refining front, while it has managed to outperform the petrochemicals segment in terms of growth and PBIT margins, the scenario may get reversed going forward if the petroleum product prices sustain at the current levels.

The other income of the company, which increased by 8% in 1HFY04, mainly consists of interest and dividend income. Interest income also fell 15% YoY on the back of refinancing efforts by the company of its high-cost long-term debts. It must be noted that the company, as part of a restructuring exercise, had offered VRS to its employees. The extra-ordinary charge of over Rs 1 bn is due to the fact that around 1,700 people opted for the same. The capex figure for the company in the first half of FY04 stood at Rs 23 bn.

At Rs 482, the stock is trading at a P/E multiple of 14.2x its annualised 1HFY04 earnings. The petrochemical cycle is on an upturn and this apart, the natural gas discovery promises lot of potential for the company going forward. The company has plans to increase its petrochemicals capacity by about 10% and this will further help it capitalize from the cyclical upturn. Its entry in the marketing of petroleum products will further help it realize the benefits of integration. Amidst all these positives, significant investment in telecom and refining distribution is a worrying aspect, owing to the execution risks involved in the initial years. Also, the shareholding structure between various new initiatives is complex. This increases the risk profile of the stock significantly from a retail investor perspective.

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