RIL: Big numbers

Gross refining margins boost Reliance's bottomline

The street had already factored sharply better March quarter numbers for RIL, but the company's 48.33 per cent growth in profit before extra-ordinary items beat even the most optimistic forecast.

The stock however, succumbed to selling pressure and fell 1.5 per cent in Wednesday trading, probably on account of the continuing concerns about the 'ownership issues' between the Ambani brothers.

As anticipated, a sharply improved performance by the company's refining division has helped profits grow. Analysts point out that gross refining margins (GRM) in the last quarter were pegged at $10 per barrel compared with $7.2 per barrel a year ago, and $9.8 per barrel in the December quarter.

Singapore refining margins, which averaged about $4.27 per barrel in Q4 FY05, were much lower. Analysts say that as the company refines large quantities of 'sour' type crude, GRMs were higher.

Profit at the company's refinery division, which accounted for 56 per cent of gross turnover in the March quarter, has jumped 45 per cent.

Like IPCL, RIL's petrochemical division has also benefited from a revival in user industries' offtake for polymers in the last quarter. Also the company has increased its focus on higher value products.

As a result, segment revenues have grown 39.12 per cent. As anticipated, this division has faced higher operating costs ""- naphtha costs have gone up about 16 per cent y-o-y in the March quarter.

That's the reason segment profit has grown only 9.82 per cent. Also, the company's Infocomm division has turned around "" net profit was at Rs 51 crore in FY05 compared with a loss of Rs 390 crore in the previous year.

With all divisions showing improved performance, operating profit has grown 34 per cent to Rs 3546 crore and the operating profit margin has expanded 112 basis points to 19.87 per cent in Q4.

The RIL stock trades at about 10 times trailing earnings, broadly in tune with other commodity stocks. However, going forward, the petrochemical cycle and GRM are expected to remain strong in the near term.

The company is therefore expected to grow its EPS by around 20 - 25 per cent in FY06. That gives a very low PEG (price earning to growth) ratio for the stock, indicating the potential upside once the ownership question is settled.

Indian Rayon

Even for investors enthused about the prospects of Indian Rayon's insurance venture yielding profits from FY 2007, the stock's current price of Rs 415 on a consolidated earnings per share of Rs 8.78 for FY 2005 would seem steep, in spite of consolidated EPS growing 80 per cent in the last year.

For the standalone company, EPS in FY 05 was Rs 18.98, down from Rs 21.91 a year earlier.

However, EPS growth on a standalone basis for the fourth quarter has been strong, growing 43 per cent y-o-y.

The old margin concerns remain""""high inventory and imports from China affecting VFY realisations, low profitability in textiles, and the challenge of increasing profits in the garments segment.

Q4, however, saw improved profitability in carbon black with the passing on of higher costs to customers.

The company's strategy has been to increase capacities and volumes, and this has enabled it to grow profits in site of margin pressures.

Among other businesses, while the insurance business continues to grow revenues handsomely, the BPO business has turned cash positive for the whole year.

It's worth noting, however, that for the standalone company, profits before tax and exceptional items was up just 8.7 per cent y-o-y in the fourth quarter.

With contributions from Amriteshwar Mathur