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Reliance Industries: Making the most of it

Oct 25, 2004

Introduction to results
Reliance Industries, the country’s largest private sector player, has announced its 2QFY05 results today. While the topline has shown a robust 27% YoY growth during the quarter, the bottomline has witnessed a jump of 39% YoY. Operating margins have also improved by 110 basis points.

What is the company’s business?
Reliance Industries is an integrated energy major with business interests across the hydrocarbons value chain ranging from upstream oil and gas exploration to downstream refining and petrochemicals business. Further, it also has a presence in telecom and textiles. Having said that, the company has now ventured into petro-products retailing business with over 200 retail outlets having already been set up to date. Also, its exploration business, which currently contributes a mere 2% to its revenues, will become a major contributor over the next few years.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 126,930 161,640 27.3% 251,940 304,440 20.8%
Expenditure 103,500 129,940 25.5% 204,440 244,690 19.7%
Operating profit (EBDITA) 23,430 31,700 35.3% 47,500 59,750 25.8%
EBDITA margin (%) 18.5% 19.6%   18.9% 19.6%  
Other income 2,510 2,960 17.9% 4,380 6,430 46.8%
Interest 2,320 4,340 87.1% 7,000 9,020 28.9%
Depreciation 7,780 9,140 17.5% 14,780 18,300 23.8%
Profit before tax 15,840 21,180 33.7% 30,100 38,860 29.1%
Extraordinary income/(expense) (310) -   (1,070)   -100.0%
Tax 2,900 3,660 26.2% 5,360 6,970 30.0%
Profit after tax/(loss) 12,630 17,520 38.7% 23,670 31,890 34.7%
Net profit margin (%) 10.0% 10.8%   9.4% 10.5%  
No. of shares (m) 1,396.0 1,396.0   1,396.0 1,396.0  
Diluted earnings per share (Rs)* 36.2 50.2   33.9 45.7  
Price to earnings ratio (x)   10.7     11.7  
(* annualised)            

What has driven performance in 2QFY05?
A perfect mix of volumes and pricing: The topline growth of 27% could be attributed to a 17% YoY hike in product prices and volumes growth of 7% YoY. Further, since the offtake of petro-products from Reliance by the domestic PSUs has declined in the current fiscal, the company shifted its focus towards exports (28% YoY growth). The volume growth could be attributed to the strong petrochemicals demand in the international markets driven mainly by acute shortage of additional capacities, thereby narrowing demand and supply gap, and improving the realisations scenario for petrochemicals players. Petroleum product prices at the refinery gate have touched record highs, resulting in higher realizations for the refining business.

Expenditure Table
(%) of sales 2QFY04 2QFY05 1HFY04 1HFY05
Raw materials consumption 68.2% 70.3% 69.4% 69.2%
Staff cost 1.3% 1.1% 1.3% 1.2%
Other expenditure 12.1% 8.9% 11.0% 10.0%

Better utilization and cheaper crude: Operating margins have improved by 110 basis points despite a 26% rise in expenditure. This could be attributed to the fact that product prices have risen at a much faster rate as compared to raw material costs. Although crude prices have increased by over 50% during 1HFY05 as compared to FY04 average prices, these costs have been a pass through for Reliance and as a result, margins have improved YoY. During 1HFY05, the company achieved 96% capacity utilization of its refinery at Jamnagar, which fares better than that of N. America (94%) and Europe (87%). Reliance Industries’ Jamnagar refinery is one of the most flexible and complex refineries in the world and generally processes hard crude, which is cheaper than the crude used by other PSU refineries in the country by nearly US$ 4 to US$ 10 per barrel. As a result, the company will witness better than industry margins.

Net profit: The bottomline growth of 39% is a result of a trickle down effect on account of strong realizations and a growth of 18% in other income. However, but for an 87% growth in interest expenditure, the bottomline could have been much better. Depreciation costs have also grown by 18% YoY.

Segmental performance: During 2QFY05, the petrochemicals business contributed over 41% of the gross revenues, while refining business maintained its share of nearly 57%. However, the tables below show that the EBIT has zoomed during 2QFY05 as compared to the corresponding period last fiscal, while that of the refining business has witnessed a steep increase. This is indicative of the strength of petro-product prices in the global markets and the fact that Reliance has been successful in riding this demand driven wave.

Segmental Revenues
(%) of Gross sales 2QFY04 2QFY05 1HFY04 1HFY05
Petrochemicals 41.6% 41.1% 41.0% 40.2%
Refining 56.7% 56.6% 55.7% 57.4%
Others 1.7% 2.2% 3.3% 2.4%
Segmental EBIT
(%) of total EBIT 2QFY04 2QFY05 1HFY04 1HFY05
Petrochemicals 49.4% 40.6% 44.0% 39.9%
Refining 44.8% 48.7% 47.9% 48.9%
Others 5.8% 10.8% 8.1% 11.3%

What to expect?
At Rs 536, the stock is trading at a price to earnings multiple of 10.7 times 2QFY05 annualized earnings. Going forward, we believe lack of any significant capacity addition in the petrochemicals business and the continuing strength in global demand is likely to aid Reliance sustain its performance. Also, the current record refining margins are likely to sustain in the medium term as global scenario witnesses tight demand-supply situation. Further, with India being in a developing stage, petroleum consumption is likely to increase further. However, Reliance is likely to face some pressure on the retail marketing front (200 outlets) where it faces stiff competition from the PSU majors such as IOC, IBP, HPCL and BPCL, which, together account for over 22,000 retail outlets.


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