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RIL: Realisations to the rescue

Oct 31, 2002

Reliance Industries Ltd. (RIL) has reported second quarter results for FY03 on amalgamated basis. Amalgamation with refining subsidiary, Reliance Petroleum Ltd. (RPL) was approved by authorities on September 19, 2002 with effect from April 1, 2001. Pending approval, results for the first quarter were on stand alone basis. Performance at the topline, compared to the previous quarter, has improved.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net sales 107,240 115,190 7.4% 218,300 221,690 1.6%
Other Income 2,600 2,040 -21.5% 3,930 4,050 3.1%
Expenditure 86,880 93,660 7.8% 177,340 179,640 1.3%
Operating Profit (EBDITA) 20,360 21,530 5.7% 40,960 42,050 2.7%
Operating Profit Margin (%) 19.0% 18.7%   18.8% 19.0%  
Interest 5,010 4,130 -17.6% 10,010 8,200 -18.1%
Depreciation 7,010 6,570 -6.3% 13,650 13,030 -4.5%
Profit before Tax 10,940 12,870 17.6% 21,230 24,870 17.1%
Tax 2,930 2,850 -2.7% 5,870 5,670 -3.4%
Profit after Tax/(Loss) 8,010 10,020 25.1% 15,360 19,200 25.0%
Net profit margin (%) 7.5% 8.7%   7.0% 8.7%  
No. of Shares 1,396.4 1,396.4   1,396.4 1,396.4  
Diluted Earnings per share* 22.9 28.7   22.0 27.5  
P/E Ratio   8.6     8.9  

Having said that, both RIL and RPL had reported higher sales in 1QFY03. Sales for the quarter, as indicated in our report for consolidated results, has been driven by realisations. During the concerned period, crude oil prices (Brent blend) were higher by an estimated 6.1% YoY accompanied by commensurate rise in international product prices. Domestic consumption of petroleum products exhibited stability after registering negative growth last fiscal. Industry growth continues to be driven by petrol and LPG. Across the board improvement in vehicle sales and shift towards LPG from kerosene is propelling growth of these products. Refining revenues could have received support from volumes, as capacity utilisation levels rose by 3% to 110%.

Similar to group company, Indian Petrochemicals Corporation Ltd. (IPCL), petrochemical division sales seem to be driven by improved realisations. Petrochemical prices -- except fibre intermediates -- for quarter ended September '02 are higher YoY. Average product prices are likely to have increased by low double digits. Division volumes are likely have suffered, as polyester and polymer industry have registered weak consumption. Polyester demand has grown by a marginal 3% YoY in 1HFY03. While polymers, after registering double digit growth in the last two years, has shown a 7% drop in the same period. Revenues from other operations, primarily consisting of oil & gas, has registered a decline of 46% YoY in gross sales.

Margins for the quarter have remained stable. Considering commensurate rise in petroleum product and crude oil prices, we reckon margins in refining business are likely to have remained flat. Petrochemical division margins are likely to have improved with product realisations rising since beginning of FY03. RIL on stand alone basis reported higher margins for 1QFY03. Also, IPCL has shown improvement in margins for quarter ended September '02. Margins are likely to have been impacted by other businesses. That said, the higher production and flat sale volumes has added to the inventory build up from the first quarter.

Interest costs of the company, YoY, have been declining over the past seven consecutive quarters. This is due to active re-financing & repayment of high cost debt. RIL, over the past three years, has been progressively converting asset depreciation to written down value method. Lower depreciation over the past two quarters is a reflection of change in methodology.

At Rs 244 the scrip is trading on a multiple of 8.9x 1HFY03 annualised earnings. Valuations over the past year have fallen from 14x earnings to current levels. With the group re-entering an intensive expansion phase, execution risks are likely to have increased leading to caution among investors. The group has indicated plans of undertaking a number of large projects. Reliance Infocom has planned a 60,000 kms pan-India optic fibre network offering the entire spectrum of voice, data & video services. As per reports, the group has invested Rs 30 bn in the project. Although, RIL has entered into a two year agreement with Indian Oil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) to evacuate an estimated 13 MMTPA of products, the company is likely to independently foray into retailing of transportation fuels. Consequently, the group could be a keen contender for BPCL or HPCL. Further, RIL plans to build its exploration & production (E&P) assets and is aiming to increase E&P contribution to an estimated 10% of sales. Inherently, E&P is a risky and capital intensive business. International integrated energy sources majors tend to trade between 15x-20x earnings. RIL has yet to build the E&P business. On conservative basis, considering a weak refining & petrochemical cycle, the stock could enter double digit valuations (PER).

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