Reliance Industries’ (RIL) performance for quarter ended December 2006 (Q3) surprised markets. Against estimated net profit of Rs 1,900-2,450 crore, RIL’s net profit was Rs 2,799 crore, up 57.6% over Q3 last year.
Insight
Reliance Industries’ (RIL) performance for quarter ended December 2006 (Q3) surprised markets.
Against estimated net profit of Rs 1,900-2,450 crore, RIL’s net profit was Rs 2,799 crore, up 57.6% over Q3 last year.
Net sales were 45.71% higher at Rs 26,472 crore.
The surprise came from refining business, wherein gross refining margins (GRM) increased to $11.7 per barrel; higher than $9.1 for Q3 last year as well as sequentially; also higher than $3.9 for benchmark, Singapore GRM, for Q3.
Here, analysts had expected Reliance’s GRM to decline in line with global trends. The refinery’s capacity utilisation (crude throughput of 7.9 million tonne-MT) was also higher at 95.8% in Q3 as against 81.2% (6.7 million tonne) in Q3 last year.
In Q3 last year, the refinery was shut down during October-November, 2005 due to maintenance leading to a 15% decline in net profits to Rs 1,776 crore (over Q3 2004-05) hence, the low base effect.
Due to high complexity of RIL’s refinery, it processed higher amount of heavy crude; 1 MT more at 4.9 MT in Q3.
Further, an Enam report said, “Reliance’s strong GRMs (contrary to the regional trend) were result of the unique “hedging techniques” and operational efficiencies.” Lastly, margin improvement can also being attributed to better crude sourcing and product placement globally (exports).
To sum up, gross revenues of refining business grew 37.5% (aided by 18% volume growth) to Rs 20,870 crore, while segment (PBIT) profits jumped 124.9% to Rs 1,925 crore; PBIT margins improved 358 basis points to 9.22%.
The petrochemicals business was a mixed bag, even as gross revenues increased 48.2% to Rs 10,895 crore and segment profits increased 32.2% to Rs 1,407 crore; PBIT margins were down 156 basis points to 12.91%.
Here, polyester margins were under pressure, while polymer margins improved on account of better prices. Overall, revenue growth was also aided by a 30% rise in volumes—capacity expanded by 550,000 tonnes (polyester and fibre) and 730,000 tonne (PTA) during Q2 2006-07.
Lastly, an improvement in overall cost efficiency led to a 14.24% reduction in other expenditure to Rs 2,048 crore during Q3. Going forward, the outlook for the business is positive.
The key triggers for the stock will be the progress in oil & gas exploration, retail and SEZ.
In medium term (15-24 months) though, it will interesting to see how RIL manages its net interest expenses (adjusted for other income), which was up by Rs 673 crore during 9-months ended December 2006, as spends towards new businesses increase.
At Rs 1,380.25, the stock trades at a PE of 18.4 times its projected EPS of Rs 75 for 2006-07.
Beating expectations
Siemens India, which caters to needs of diverse industries (railways, healthcare, power T&D, industrial sector, etc), saw its net sales rise 91% to Rs 1,627 crore for its first quarter ended December 2006 (Q1), over Q1 previous year. Net profit increased by 100% to Rs 98.1 crore, while profit before tax (excluding other income) was up 80.4% to Rs 125.47 crore.
The company’s unexecuted order value (December 2006) was Rs 11,040 crore, up 56% as compared with September 2006; new orders were up 23% to Rs 5,127.5 crore over Q1 last year.
Among recent orders include the ones from Qatar General Electricity and Water Corp for Rs 4,000 crore, jointly with Siemens AG; to be executed over a 22 month period.
The power business which constituted 58% of revenues, registered 183% year-on-year growth largely on account of the commencement of transformer facility and execution of Qatar order.
The growth in overall operating profit (Rs 123 crore) though was lower at 55.7% on account of increasing share of the power business (low margin in nature) and also on account of high raw material costs.
Besides, the automation & drives division (18.6% of revenues) saw segment margins decline 184 basis points to 4.45%, while healthcare division reported a loss of Rs 6.6 crore. Overall, margins thus stood at 7.6% as compared to 9.3% for Q1 last year.
The order intake can be expected to remain strong considering the buoyancy in the infrastructure segment, especially from the Middle Eastern regions. Expansion plans include setting up three new factories, one and Baroda and two at Kalwa at a cost of Rs 350 crore.
The factory at Baroda will manufacture industrial turbines and the two factories at Kalwa will produce transformers and traction motors. Going forward the isolators business will be a growth driver in terms of exports.
It has exceeded the market expectations and the stock at Rs 1,181.20 trades at an estimated PE of 30 for year ending September 2007.
Long-term investors, with a strong belief in the macroeconomic parameters of India and the export initiative of the company, can consider it at declines.
Contributed by Vishal Chhabria and Devangi Bhuta
Fair disclosure: Vishal Chhabria’s family holds a small stake in Reliance
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