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Reliance Ind.: Refining and Petchem shine - Views on News from Equitymaster

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Reliance Ind.: Refining and Petchem shine
Oct 19, 2011

Reliance Industries (RIL) announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported a 36.7% YoY and 15.8% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales increase by 36.7% YoY during the quarter. For 1HFY12, the sales were up 37.9% YoY.
  • Operating profits were up 4.8% during the quarter while operating margins were down 3.8% (YoY). For 1HFY12, operating profits were up 5.5% but margins were down 3.8% (YoY). The crude oil and natural gas production from KG D6 declined due to reservoir complexity.
  • Net income up 15.8% YoY for the quarter. The net profit margins for the quarter declined by 1.3% YoY. For 1HFY12, the bottomline was up 16.3% YoY, however, the margins declined by 1.3% (YoY).
  • As per the company, during the half year, the gas production from the KG-D6 block declined 20.3% YoY. The oil production also dropped 42.1% YoY.
  • The company reported gross refining margins (GRMs) at US$ 10.1 (up 28% YoY) per barrel for the quarter and US$ 10.2 per barrel for 1HFY12.
  • The company reported a cash balance (including cash equivalents) of Rs 615 bn and an outstanding debt worth Rs 714 bn.

Standalone financial snapshot
(Rsm) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 574,790 785,690 36.7% 1,157,070 1,595,870 37.9%
Expenditure 480,830 687,250 42.9% 969,690 1,398,170 44.2%
Operating profit (EBDITA) 93,960 98,440 4.8% 187,380 197,700 5.5%
EBDITA margin (%) 16.35% 12.53%   16.19% 12.39%  
Other income 6,720 11,020 64.0% 13,940 21,800 56.4%
Interest 5,420 6,600 21.8% 10,830 12,050 11.3%
Depreciation 33,770 29,690 -12.1% 68,620 61,640 -10.2%
Profit before tax 61,490 73,170 19.0% 121,870 145,810 19.6%
Profit before tax margin (%) 10.70% 9.31%   10.53% 9.14%  
Tax 12,260 16,140 31.6% 24,130 32,170 33.3%
Profit after tax/(loss) 49,230 57,030 15.8% 97,740 113,640 16.3%
Net profit margin (%) 8.56% 7.26%   8.45% 7.12%  
No. of shares (m)         3274  
Diluted earnings per share (Rs)*       66.8  
Price to earnings ratio (x)*       12.2  
*On a trailing 12 months basis

What has driven performance in 2QFY12?
  • The topline growth of 36.7% YoY for the quarter was on account of increase in volumes (accounting for 3.5% growth in revenues) and higher realizations (accounting for 32.5% growth in revenues). The company registered a growth of 52.2% in revenues from exports. Segmentwise; Refining, Petrochemicals registered sales growth of 37.1% YoY and 39.5% YoY respectively, however, the sales from oil and gas division declined by 17.2% YoY during the quarter. For half year, the sales from Refining and Petrochemicals division was up 41.5% YoY and 36.0% YoY respectively while sales from Oil and Gas division declined by 17.2% YoY respectively (due to lower production from KG D6)


  • Segmental performance (Rs m)
    Refining (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Revenues 496,720 680,960 37.1% 1,002,030 1,417,850 41.5%
    EBIT 21,920 30,750 40.3% 42,270 62,740 48.4%
    EBIT Margins (%) 4.4% 4.5%   4.2% 4.4%  
    Petrochemicals (Rs m)            
    Revenues 150,960 210,660 39.5% 289,990 394,320 36.0%
    EBIT 21,970 24,220 10.2% 42,500 46,370 9.1%
    EBIT Margins (%) 14.6% 11.5%   14.7% 11.8%  
    Oil and Gas (Rs m)            
    Revenues 43,030 35,630 -17.2% 89,680 74,570 -16.8%
    EBIT 17,060 15,310 -10.3% 36,270 30,040 -17.2%
    EBIT Margins (%) 39.6% 43.0%   40.4% 40.3%  

  • Operating profits up 4.8% YoY during the quarter while operating margins were down 3.8% (YoY). The operating margins declined as raw material costs increased to 80.9% of sales (from 75.8% of sales) last year. However, the decline in margins was arrested as staff costs declined to 0.9% of sales (1.1% of sales last year) and other costs declined to 5.7% of sales (from 6.7% of sales) last year. Segmentwise, Refining and Petrochemicals registered 40.3% YoY and 10.2% YoY increase in operating profits respectively while Oil and Gas division profits declined 10.3% YoY. The margins for Refining and Oil and Gas registered 0.1% (YoY) and 3.3% (YoY) increase respectively. However, Petrochem division margins declined to 11.5% (14.6% last year). For the first half year, the company delivered strong refining performance, with crude thruput at 34.1MMT (million metric tonne, operating rate up 110%) and GRM of US$ 10.2/bbl (up 32% YoY).Similarly, the production in Petrochemical division also registered an 8% YoY increase.


  • Cost break up
    (Rsm) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw material costs 435,540 635,680 46.0% 882,400 1,294,810 46.7%
    as a% of sales 75.8% 80.9%   76.3% 81.1%  
    Staff costs 6600 7,150 8.3% 12770 15,930 24.7%
    as a% of sales 1.1% 0.9%   1.1% 1.0%  
    Other expenses 38690 44,420 14.8% 74520 87,430 17.3%
    as a% of sales 6.7% 5.7%   6.4% 5.5%  
    Total expenses 480,830 687,250 42.9% 969,690 1,398,170 44.2%
      83.7% 87.5%   83.8% 87.6%  

  • The net profits for the quarter were up 15.8% YoY, largely driven by Refining and Petrochemicals business. Besides an increase in topline and better refining margins, the bottomline was supported by 64% YoY increase in other income and 12% YoY decrease in depreciation charges.

What to expect?

At a price of Rs 812, the stock is trading 12 times its trailing 12 months earnings per share. As per the management, the result was in line with the expectations. RILís refineries are operating at 110%. Going forward, we expect the company to be able to sustain current levels of GRMs. However, the fate of the company will hinge on guidance on output levels from KG D6 basin and how the company employs its cash.

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