Reliance Industries: Surprise package

Operating profit up but margins shrink

Reliance Industries (RIL) has surprised analysts by beating their expectations. The company has reported 14.1 per cent y-o-y growth in its operating profit to Rs 4,046 crore in the fourth quarter of FY06, which is lower than the 37.57 per cent growth in its sales. As a result, the stock gained 1.9 per cent to Rs 996 on Thursday.

However, RIL's operating profit margin shrank 339 basis points y-o-y to 16.48 per cent.

This was due to 37.1 per cent rise in adjusted raw material costs in the March quarter. Other expenditure too went up 107.76 per cent y-o-y to Rs 3,102 crore. Higher raw material costs were largely due to surging input costs such as naphtha, say analysts.

In the December 2005 quarter too, the company had seen its operating profit margin slip 213 basis points to 16.38 per cent, but that was due to planned maintenance at its Jamnagar refinery.

RIL's gross refining margins in the last quarter were pegged at $10.4 per barrel compared with $10 per barrel a year earlier, say analysts.

In contrast, benchmark Singapore refining margins were down by about 30 per cent to $4.3 per barrel. Segment revenues of the refining division grew 60.9 per cent y-o-y to Rs 21,248 crore in the last quarter.

Meanwhile, production volumes of polymer products such as polypropylene, polyethylene and PVC grew 2.1 per cent y-o-y to 0.49 million tonne in the last quarter.

Higher polymer prices helped offset the increase in input costs of naphtha. Going forward, the company is expected to continue enjoying strong gross refining margins.

As a result, the stock gets a discounting of about 14.4 times estimated FY07 earnings.

Grasim: Concrete success

Grasim posted 17.24 per cent y-o-y growth in consolidated sales during the March 2006 quarter on the back of 35.22 per cent increase in cement revenues. Its VSF business has posted 8.9 per cent growth during the quarter, while sponge iron continues to ail, declining 60.5 per cent.

A tight control on costs resulted in 20 per cent rise in operating profit, though freight costs increased 53 per cent on account of the ban on overloading of trucks during the March quarter. Operating profit margin improved by 53 basis points to 22.69 per cent.

The company's cement realisations improved by 12 per cent y-o-y. For subsidiary UltraTech, the figure improved by 14 per cent, which is more or less in line with ACC's 14 per cent rise in realisations.

The decline is VSF realisations finally showed signs of easing, as the division posted 12 per cent growth in volume sales. Gas supplies, higher input costs and 20 per cent lower realisations resulted in sponge iron sales declining 60.5 per cent.

Going forward, cement should continue to post robust growth, while the worst seems to be over in the VSF business. Sponge iron will continue to be a drag in the near future. The stock fell 0.72 per cent along with the overall market on Thursday to Rs 2360, and trades at about 19 times the estimated FY06 EPS.