A cyclical lift for Reliance

The upturn in economy has come in handy for the behemoth

The cyclical upturn in the economy has resulted in improved performance by all of Reliance's businesses"�the company's net profit grew 27 per cent to Rs 1,374 crore in the third quarter of Q304 on the back of a 14 per cent rise in net sales.

Operating profit grew 21 per cent to Rs 2,588 crore in Q304, thanks to a 120 basis points improvement in operating margin. The results were well received by the markets, as the scrip managed to buck the selling pressure and rose 3.44 per cent on the BSE to end at Rs 578.45.

Petrochemicals
Demand for PFY, PSF and PET grew 6 per cent and that for its polymer products grew by 9 per cent. The company has sought to move up the value chain by placing an increased emphasis on high value products and this has helped the division grow its sales by 12.7 per cent to Rs 8,404 crore.

Besides, it had effected small increases in PE and PP (polymer products) in December. However, the division's margins were flat, and EBIT grew in line with growth in sales to Rs 1005 crore.

Going forward, this division (which accounts for over 50 per cent of segment profit) is expected to drive earnings growth for the company thanks to the cyclical upswing.

Refining and Marketing
This division has benefited from an uptrend in the demand for petroleum products in the country in November and December '03. It processed 21.78 million tonnes of crude in Q304 at a capacity utilisation of 107 per cent, despite a planned shutdown in certain parts of the refinery in December.

The division saw a 27 per cent growth in its turnover to Rs 9983 crore. Also, refining margins were robust in tune with higher crude prices prevailing in international oil markets. EBIT margin expanded by 90 basis points and as a result segment earnings jumped 42.5 per cent to Rs 815 crore.

Going forward, the company's plans of setting up 5849 retail outlets across the country should help its profitability, since margins are generally high in the retailing business.

Others
The oil & gas division currently contributes less than 1 per cent to the company's gross turnover, but this is expected to grow significantly in the next 3-4 years due to the rapid ramp up in its activities.

The company has been recently awarded 9 more blocks under the third round of New Exploration Licensing Policy (NELP) covering an area of 113,000 sq kilometre.

The company has also submitted bid for the fourth round of NELP and if successful, it would increase its acreage by another 114,000 square km.

The Infocomm division expected is to have 7-8 million subscribers by end-FY04, and this should help the company achieve a break even.

HCL Tech

HCL Technologies, after a splendid September quarter, continued its good performance with a 11 per cent sequential growth in revenues and a 130 basis points jump in EBITDA (earnings before interest, depreciation and tax) margin. The jump in revenues was largely because of an improvement in the core software business which grew at 10 per cent.

The other smaller business also recorded good growth - the BPO business grew 13 per cent, while the infrastructure services business grew revenues by 25 per cent.

Billing rates, interestingly, continued to decline at 2-3 per cent, which is strange but this was offset by a an improvement in utilisation - offshore utilisation was 77.1 per cent last quarter, compared to 74.8 per cent in the March quarter.

Besides, there were savings on salary costs, partly because some effort shifted from US sites to the offshore centres in India. As a result, EBITDA margin improved by around 130 basis points to 20 per cent.

Another highlight of the last quarter was the sale of the company's stake in HCL Perot Systems for a net gain of almost $57 million. At around two times sales and 17 times estimated 2003 earnings, HCLT certainly got a decent bargain. What's more, this further boosted its cash position to Rs 2130 crore, or over Rs 70 per share.

Adjusted for the cash on the books, the stock trades at just around 14 times estimated FY05 earnings, which is lower compared to peers in the top rung of the sector.

This despite the fact that the stock has been the best performing one since October, having risen around 80 per cent compared to just 30 per cent for NSE IT index. But the main concern relating to HCL Tech is inconsistency in performance. Before the previous two quarters, the company posted flat topline growth for a number of quarters.

Clearly, in order to merit a rerating, the company would have to maintain its current performance. What works in the company's favour its expertise in the technology space has now extended to more verticals like avionics and medical electronics.

These new verticals should help the company maintain the momentum in topline growth.

With contributions by Amriteshwar Mathur and Mobis Philipose