Though business prospects remain strong for Reliance, the stock could remain lacklustre till the stand-off between the brothers is sorted out. | |
RELIANCE INDUSTRIES
High refining margins drive bottomline growth |
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| Amid all the gloom over issues of corporate governance at Reliance group, RIL - the group's flagship company - posted third-quarter numbers with a vengeance. |
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| The company's net profits grew 52.18 per cent while sales rose 42.14 per cent, far higher than the most optimistic analysts' estimates. |
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Bottomline growth was driven by high refining margins and increases in sales of the petrochemical divisions, but an increase in raw material (naphta) prices squeezed operating margin.
| Reliance Industries | | (In Rs crore) | Q3FY05 | Q3FY04 | % Change | | Net sales | 17768.00 | 12500.00 | 42.14 | | Other income | 331.00 | 223.00 | 48.43 | | Operating profit | 3290.00 | 2566.00 | 28.22 | | OPM (%) | 18.52 | 20.53 | - | | Net profit | 2091.00 | 1374.00 | 52.18 | | NPM (%) | 11.77 | 10.99 | - | | EPS (Rs) | 15.00 | 9.80 | - | | Trailing 12-month P/E | 11.93 |
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Gross refining margins (GRMs) grew 58 per cent y-o-y to $9.8 per barrel, well above Q2's GRMs of $8.2 per barrel. And with the refining division contributing almost 54 per cent of gross turnover and 58.5 per cent of total segment profit in the December quarter, it's obviously the key growth driver.
Improved realisations helped segment profit grow 93.6 per cent. Segment profit margins improved 360 basis points to 11.76 per cent.
Domestic demand for polymers was more or less flat in Q2FY05. However, the price cuts announced for its variety of polymer products in late Q3 helped the petrochemicals division grow its segment revenue 31.1 per cent. But segment profit fell 15.22 per cent, as the price of naptha - a key input - went up about 46 per cent y-o-y.
Higher naptha prices have been reflected in a 55.68 per cent rise in total raw material costs to Rs 12, 687 crore. |
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| Naptha prices have cooled about 11 per cent over the last six weeks and going forward that should help improve the profitability of the petrochemical division. |
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| GRMs for Indian refiners appear to have peaked in the medium term, so further growth in Reliance's profit should be largely determined by the performance of its petrochemical division. |
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| The Reliance stock is currently trading at 10x FY06 earnings. Though business prospects remain strong for Reliance, the stock could remain lacklustre till the stand-off between the brothers is sorted out. |
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RELIANCE ENERGY
Rise in costs affects margins |
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Reliance Energy's margins were under pressure as its expenditure mounted almost 11 per cent to Rs 799.21 crore while sales grew at a slower pace at 8.19 per cent to Rs 929.13 crore.
Consequently, operating profit dipped 1.8 per cent to Rs 129.92 crore and margins squeezed 143 basis points to 13.98 per cent.
| Reliance Energy | | (In Rs crore) | Q3FY05 | Q3FY04 | % Change | | Net sales | 929.13 | 858.81 | 8.19 | | Other income | 205.62 | 41.13 | 399.93 | | Operating profit | 129.92 | 132.39 | -1.87 | | OPM (%) | 13.98 | 15.42 | - | | Net profit | 134.22 | 53.38 | 151.44 | | NPM (%) | 14.45 | 6.22 | - | | EPS (Rs) | 6.57 | 3.54 | - | | Trailing 12-month P/E | 19.60 |
The rise in expenditure was largely driven by a 55 per cent rise in the cost of materials to Rs 164.25 crore - as a percentage of sales it increased to 17.7 per cent from 12.3 per cent.
Even the 2.5 per cent drop in the cost of electrical energy purchased to Rs 281.52 crore did not help the company prevent the fall in operating profit.
Net rose 155 per cent to Rs 134.22 crore, mainly because of the other income component which grew 399.9 per cent to Rs 205.62 crore.
The company's Dahanu thermal plant station in Maharashtra continued to perform at a high PLF (plant load factor) of 100.7 per cent against 99.8 per cent and received accolades as one the world's best plants.
The realisation in Mumbai distribution business (which forms roughly 80 per cent of the company's energy business) remained flat at Rs 3.9 per unit while volumes rose about 8 per cent to 1.62 billion units.
EBITA from the EPC (engineering, procurement and construction) and contract division fell 83.3 per cent to Rs 1.86 crore, mainly due to an increase in the costs of materials purchased. |
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| Analysts are wary about the stock since the battle over the control of Reliance group companies has raised doubts about corporate governance. However, the Delhi distribution business has already posted a breakeven and is expected to do well going ahead. |
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| It has also applied for licenses for areas in Uttar Pradesh and Maharashtra. For FY05, analysts expect an EPS of Rs 28. Given the current price of Rs 505.25, the stock trades at a P/E multiple of 18 times its forward earnings (current P/E stands at 19.6). |
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GUJARAT AMBUJA
Higher realisations drive growth |
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Gujarat Ambuja's second-quarter earnings surged. Driven by good realisations and higher volumes, the company posted a 50.4 per cent increase in net profit to Rs 89.55 crore.
Realisations were up 9 per cent while volumes grew 31 per cent to 3.34 million tonnes. Sales recorded a growth of 42.33 per cent to Rs 619.83 crore.
| Gujarat Ambuja | | (In Rs crore) | Q2FY05 | Q2FY04 | % Change | | Net sales | 619.83 | 435.50 | 42.33 | | Other income | 40.84 | 9.71 | 320.60 | | Operating profit | 176.81 | 112.60 | 57.02 | | OPM (%) | 28.53 | 25.86 | - | | Net profit | 89.55 | 59.54 | 50.40 | | NPM (%) | 14.45 | 13.67 | - | | EPS (Rs) | 4.97 | 3.45 | - | | Trailing 12-month P/E | 19.14 |
While total expenditure increased 45.4 per cent to Rs 483.86 crore, operating margin expanded 267 basis points to 28.53 per cent and net margins rose 78 basis points to 14.45 per cent.
Due to higher coal prices last year, power and fuel costs were up 52 per cent to Rs 178.51 crore. Raw material costs increased 3 per cent to Rs 30.76 crore while freight charges were up Rs 30 per cent to Rs 115.43 crore. However, jointly they fell 170 basis points as a percentage of sales.
The company produced 3.68 million tonnes of cement (up 15 per cent) and dispatched 3.66 million tonnes (up 14.7 per cent) in the quarter. |
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| The sector is expected to see heightened activity, mainly driven by the development of infrastructure and construction of more houses. For FY05, analysts expect an EPS of Rs 25. Given the current price of Rs 423.5, the stock trades at a P/E multiple of 16.9 times its forward earnings (current P/E stands at 19.4). |
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