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Reliance Industries: Margins under pressure

Oct 23, 2008

Performance summary
  • Topline increases by 40% YoY during 2QFY09.
  • EBITDA margins decline to 14.5% in 2QFY09 down from 18% in 2QFY08.
  • Other income declines by 10% YoY during 2QFY09.
  • Bottomline registers a growth of 7.4% YoY during 2QFY09, lower than topline growth due to contraction in margins and lower other income.

Standalone financial snapshot

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 320,430 447,870 39.8% 615,670 863,660 40.3%
Expenditure 262,620 383,130 45.9% 501,130 737,710 47.2%
Operating profit (EBDITA) 57,810 64,740 12.0% 114,540 125,950 10.0%
EBDITA margin (%) 18.0% 14.5% 18.6% 14.6%
Other income 1,680 1,510 -10.1% 3,650 3,770 3.3%
Interest 2,570 4,370 70.0% 5,520 7,310 32.4%
Depreciation 11,290 12,640 12.0% 22,540 24,150 7.1%
Profit before tax 45,630 49,240 7.9% 90,130 98,260 9.0%
Tax 7,260 8,020 10.5% 15,460 15,940 3.1%
Profit after tax/(loss) 38,370 41,220 7.4% 74,670 82,320 10.2%
Net profit margin (%) 12.0% 9.2% 12.1% 9.5%
No. of shares (m) 1,574
Diluted earnings per share (Rs)* 128
Price to earnings ratio (x)* 9.5
* On trailing twelve months basis

What has driven performance in 2QFY09?
  • RIL witnessed a 36% growth in revenue due to increase in prices and a 2% growth due to increase in volumes.

  • RILís Jamnagar refinery processed 16.34 m tonnes of crude during 2QFY09, at an utilisation rate of 99% compared to 16.1 m tonnes during 2QFY08.

  • Revenue for the refining and marketing segment increased by 50% from Rs 459 bn to Rs 690 bn (US$ 14.7 bn) mainly due to high product prices driven by high crude oil prices. Increase in prices accounted for 43% of growth in revenue, while higher volumes accounted for 7%. Exports of refined products were at US$ 10.3 bn. This accounted for 11 m tonnes of product volume during 2QFY09 as compared to 10.8 m tonnes for 2QFY08.

  • Production of petrochemical products increased from 9.8 m tonnes to 10 m tonnes.

  • RIL continues to adjust the foreign currency exchange differences on amounts borrowed for acquisition of fixed assets, to the fixed assets. Had it charged the same to its profit and loss account, the PAT for the 1HFY09 would have been lower by Rs. 11.4 bn (US$ 242 m).

  • Oil production commenced from the companyís KG D6 basin during the quarter with an initial production of 5,000 barrels per day and current production of 10,000 barrels per day.

  • The second refinery at Jamnagar owned by RILís subsidiary Reliance Petroleum has achieved 97% progress. Another subsidiary, Reliance Retail now operates a total of 816 stores pan India with over 3.8 m square feet of trading space.

  • The capital expenditure for the period was Rs 114 bn (US$ 2.4 billion) primarily in oil and gas business.

What to expect?
RILís refining segment is expected to deliver better GRMs compared to its peers going forward, on the back of superior product mix and complex refinery configuration. On the petrochemical front, margins are going to reduce gradually with incremental capacities coming on stream in the Middle East region. However with lower per capita consumption in the domestic markets coupled with a growing economy, higher volumes are going to propel the petrochemical EBIT.

RILís investments in E&P, organised retail and development of special economic zones (SEZs) will all be the cornerstones for future growth. In the E&P segment, it has expanded its international E&P footprint to Kurdistan, Oman, Yemen, Columbia, East Timor and Australia. There exists immense potential regarding further upside to the companyís current reserves.

At the current price of Rs 1,215, the stock is trading at a multiple of 9.5 times its standalone trailing 12 months earnings. Given RILís proven track record and superior execution capabilities and the recent correction, we hold a positive view on the stock from a long-term perspective.

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