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Reliance Industries: Petchem margins come to rescue - Views on News from Equitymaster
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  • Oct 29, 2009 - Reliance Industries: Petchem margins come to rescue

Reliance Industries: Petchem margins come to rescue
Oct 29, 2009

Performance summary
  • Net sales increase by 5% YoY during 2QFY10, led by a 9% growth in the companyís refining business. Revenues from the petrochemical business decline by 14% YoY.
  • Operating margins expand by 0.9% YoY (to 15.4%). This is largely on account of lower raw material costs and other expenditure (as percentage of sales).
  • Gross refining margins stood at US$ 6.0 per barrel during the quarter, as compared to US$ 13.3 per barrel in 2QFY09.
  • Net profits fall by 6.4% YoY during the quarter. As compared to a 0.5% YoY drop in profits before tax, the decline in profits is higher on account of higher tax outgo. During the quarter, the company also witnessed higher depreciation costs (as a percentage of sales). However, their impact was minimised due to the 316% YoY increase in other income on account of higher cash and cash equivalents.


Standalone financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 446,880 468,480 4.8% 862,010 780,350 -9.5%
Expenditure 382,070 396,310 3.7% 735,940 644,340 -12.4%
Operating profit (EBDITA) 64,810 72,170 11.4% 126,070 136,010 7.9%
EBDITA margin (%) 14.5% 15.4%   14.6% 17.4%  
Other income 1,510 6,280 315.9% 3,770 13,370 254.6%
Interest 4,370 4,620 5.7% 7,310 9,220 26.1%
Depreciation 12,700 24,320 91.5% 24,260 43,100 77.7%
Profit before tax 49,250 49,510 0.5% 98,270 97,060 -1.2%
Tax 8,090 10,990 35.8% 16,070 21,880 36.2%
Profit after tax/(loss) 41,160 38,520 -6.4% 82,200 75,180 -8.5%
Net profit margin (%) 9.2% 8.2%   9.5% 9.6%  
No. of shares (m)         1,643  
Diluted earnings per share (Rs)*         91  
Price to earnings ratio (x)*         21.9  
* On trailing twelve months basis

What has driven the performance in 2QFY10?
  • Reliance Industries posted a topline growth of 5% YoY during 2QFY10 led by a 9% growth in the companyís refining business. Revenues from the petrochemical business declined by 14% YoY.

  • In the oil & gas (exploration & production) business, the company has ramped up production from KG basin to over 40 m standard cubic meters per day. It is being supplied to 15 fertilisers, 19 power, 3 steel, 1 LPG and 2 city gas distribution companies currently. During the quarter contracts with 9 customers were executed.

  • The companyís Jamnagar refinery achieved an utilisation rate of nearly 90% during the quarter. Gross refining margins stood at US$ 6.0 per barrel during the quarter, as compared to US$ 13.3 per barrel in 2QFY09.

    Refining segment
    (Rs m) 2QFY09 2QFY10 Change
    Revenues 363,160 395,640 8.9%
    EBIT 27,740 13,470 -51.4%
    EBIT margin 7.6% 3.4%  

  • Reliance industries witnessed strong domestic demand for most of the petrochemical products. There was a substantial improvement in overall petrochemicals margins as the industry was operating on low level of inventory leading to higher domestic realisation.

    Petrochemicals segment
    (Rs m) 2QFY09 2QFY10 Change
    Revenues 155,480 133,400 -14.2%
    EBIT 18,970 21,950 15.7%
    EBIT margin 12.2% 16.5%  
  • Reliance Industries recorded a 0.9% YoY expansion of operating margins (to 15.4%).This is largely on account of lower raw material costs (crude oil and naptha) and other expenditure (as percentage of sales). While depreciation grew by 92% led by the oil & gas and refining & segments, there was a 316% YoY increase in other income on account of higher cash and cash equivalents.

  • Reliance Industries has proposed issue of bonus shares in the ratio of one equity share for every one equity share held in the Company.

  • The Petroleum Trust sold 15 m equity shares of Reliance Industries and realised about Rs 31.9 bn. Reliance Industrial Investments and Holdings, a wholly owned subsidiary of Reliance Industries is beneficiary of the Trust. The cash proceeds have resulted in reduction of Investment in subsidiaries. Profit on sale of these shares of Rs 29.4 bn will be reflected in the consolidated accounts of Reliance Industries.

  • Reliance Industries has an outstanding debt of Rs 714 bn and cash of Rs 194 bn as on 30th September 2009.

What to expect?
While RILís refining segment is currently witnessing margins pressure, it has a structural advantage vis-ŗ-vis other refiners on the back of superior product mix and complex refinery configuration. Hence, its GRMs will rebound faster compared to its peers going forward. On the petrochemical front, margins are going to reduce gradually with incremental capacities coming on stream in the Middle East region.

RILís investments in exploration and production (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 significantly to 14 blocks. There exists immense potential regarding further upside to the companyís current reserves.

At the current price of Rs 1,994 the stock is trading at a multiple of 22 times its standalone trailing twelve months earnings. While the stock is still off its all time highs, issues like complex group structure and inadequate disclosure in areas like segment wise sales and cost break up make assessment of its intrinsic value a difficult task.

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