Reliance Industries: Tough quarter

RIL had to grapple with under-recoveries, margin pressure

In the June quarter, Reliance Industries has had to grapple with surging under-recoveries in retail sales of auto fuels and a margin pressure in its petrochemical business.

The company has grown its overall operating profit by 18.8 per cent y-o-y to Rs 4,237 crore in the quarter compared with 37.88 per cent growth in net sales to Rs 24,522 crore.

But operating profit margin fell 278 basis points y-o-y to 17.27 per cent in Q1 FY07. Plus, in its key refinery division, volume of refined crude oil was hit owing to a planned maintenance in May.

The pressure on margins was on account of adjusted raw material costs rising 45.4 per cent y-o-y to Rs 17,525 crore in the last quarter.

In the refinery division, Reliance processed 7.51 million tonne of crude in Q1 FY07 compared with 7.92 million tonne a year earlier.

Its gross refining margin (GRM) stood at $12.4 a barrel in the June quarter as compared to $11.4 a barrel a year earlier. These numbers compare favourably with the benchmark Singapore refining margins of $8.9 a barrel in the last quarter.

However, analysts estimate that the company has had to bear under-recoveries of Rs 500 crore in retail sales of auto fuels last quarter.

Segment revenue of the refining division rose 29.6 per cent y-o-y to Rs 20,682 crore in the last quarter, though the segment profit went up 13.8 per cent y-o-y to Rs 2035 crore.

Meanwhile, production of polymers such as polypropylene, polyetheylene and PVC declined 1 per cent y-o-y to 469,000 tonne in Q1, given the shutdown of its cracker and downstream plants at Hazira owing to the planned maintenance.

Global prices of polymer products have shown an upturn in the last quarter following higher cost of key inputs such as naphtha.

Segment revenue of the petrochemical division rose 46.7 per cent y-o-y to Rs 9,787 crore compared with 23.2 per cent growth in segment profit to Rs 1,087 crore.

Going forward, the company's GRMs are expected to remain strong. The stock gained 1.3 per cent to Rs 995.3 on Thursday, giving the stock a discounting of 13 times estimated FY07 earnings.

Gujarat Ambuja: Cementing gains

A day after ACC's strong numbers, Gujarat Ambuja has also come out with stunning results, with its standalone operating profit doubling y-o-y to Rs 443 crore in the June quarter. Both its standalone and consolidated net profit also doubled over the June 2005 quarter.

Net sales grew 57.4 per cent y-o-y in the June quarter.

The company managed to increase its operating margin by a huge 830 basis points to 39.1 per cent in the June quarter.

Its standalone sales volumes increased by about 15 per cent to 3.77 million tonne, corroborating the growth story in cement owing to increased spend in construction activity. Net realisations rising 37 per cent y-o-y to Rs 3008.6 per tonne.

Gujarat Ambuja's realisation is similar to ACC's per tonne realisation of Rs 2985 in the June quarter. Despite Gujarat Ambuja's 46.8 per cent y-o-y increase in freight costs per tonne to Rs 577 and forex losses of Rs 18.5 crore, it managed to improve margins significantly.

Cement prices are not likely to go up much in monsoons and for Gujarat Ambuja, it will be difficult to maintain the current margins-which are likely to be the highest in the industry.

At its current price of Rs 103.5, the stock trades at a trailing P/E of about 15.6 times, which is reasonable compared with other players.

Thermax: On the boil

Thermax has posted a robust 101 per cent growth in its consolidated operating profit in the June quarter, on a top line growth of 23.7 per cent. The consolidated operating profit margin too went up 400 basis points to 10.4 per cent.

Total cost declined 18.4 per cent owing to better raw material management, as raw material cost as a percentage of sales declined by 590 basis points.

In FY06 too, Thermax had reduced raw material cost as a percentage of sales by 450 basis points. Besides, other cost control methods, Thermax has also increased sourcing from China, which will improve operating profit margin further, say analysts.

The weak link in the company's operations continues to be the UK-based subsidiary ME Engineering, which made a loss of Rs 1.5 crore in Q1.

With a consolidated order book of Rs 2,666 crore compared with Rs 1,730 crore at the end of FY06, the visibility is strong.

It is implementing a Rs 400 crore heat recovery project for a refinery and executing captive power projects of almost 300 MW.

Its new boiler and heater capacities are expected to come up in a year. The management has maintained the 30 per cent revenue growth guidance for FY07.

The company is also likely to take some action to stem the UK subsidiary's loss. The stock was up 5 per cent on Thursday to Rs 245, and trades at about 16 times estimated FY07 earnings, which is in not expensive.