RIL: Slick numbers

Higher gross refining margin does the trick for Reliance Industries

A significantly higher gross refining margin (GRM) of $11.7 a barrel in the December quarter compared with $9.1 a barrel in Q3 FY06 helped Reliance Industries post a revenue increase of 46 per cent y-o-y at Rs 26,472 crore.

The operating profit rose a smart 58 per cent to Rs 4,709 crore with the operating profit margin climbing 170 basis points to 17.7 per cent. The GRM is significantly higher than the benchmark Singapore complex for which the GRM was $3.9.

The key reasons for the higher GRM have been the lower average price of crude which has contributed the most to the increase in the margin, of approximately 60-65 per cent.

Another 20-25 per cent of the increase has resulted from better product prices with the remainder coming from improved efficiencies. Since RIL's output does not include fuel oil unlike those for Singapore refineries where fuel oil accounts for 20-25 per cent on average, RIL's realisations are comparatively better.

During the December quarter, RIL produced less of light distillates and more of heavy distillates. Also, crude throughput volumes were 18 per cent higher at 7.9 million metric tonne; however, the base was lower in Q3 FY06 as the refinery was shut for about a month in October and November 2005.

Revenues in the refining and marketing segment increased by 37 per cent in the quarter to Rs 20,870 crore with the segment margin (profit before interest and tax) rising to 9.2 per cent compared with 5.6 per cent in Q3 FY06.

Recent trends in declining crude oil prices have allowed RIL to rationalise its retail pricing. While revenues for the petrochemicals business have risen a smart 48 per cent y-o-y to Rs 10,895 crore, margins continue to be under pressure, having dropped to 12.9 per cent in Q3FY07 from 14.5 per cent in Q3 FY06.

The fall appears to have been sharper in the December quarter dragging down the nine-month EBIT margin to 13.5 per cent from 14.5 per cent in the corresponding period of FY06, owing to higher raw material prices.

Polymer margins were at a high during the September quarter but prices and margins started dropping at the end of the quarter, resulting in lower margins in the December quarter.

On the other hand, polyester margins rebounded in Q3 FY07 from the lows of the September quarter. At its current price of Rs 1,367, RIL trades at about 20 times FY08 earnings and should continue to outperform.

Siemens: Power drive

The top line growth of Siemens' standalone total income (net sales plus other operating income) by nearly 90 per cent y-o-y in the December 2006 quarter has surprised the market positively. After a weak September quarter, analysts had downgraded the stock, and tempered their growth expectations.

But if total income is up, it will still take at least another quarter or two for it to result in better profitability. Even in the December quarter, Siemens' operating profit went up by 56 per cent, slower than the sales growth.

As a result, its operating profit margin was 165 basis points lower over December 2005 to 7.54 per cent. The stock declined 0.5 per cent to Rs 1,234 after the company announced its results on Wednesday afternoon, but that would have more to do with the stock having run up 17 per cent in the past week, against the Sensex gaining 6 per cent.

The reason for lower margins is that Siemens' adjusted raw material costs (including project related work-in-progress) increased by 923 basis points y-o-y to 81.2 per cent of total income.

It is not surprising to see raw material costs rising - prices of its main inputs, metals, were up on a y-o-y basis. Even in its consolidated FY06 (year ended September) results, the company had seen its operating profit margin decline by 235 basis points.

The key power segment saw revenues rise 183 per cent y-o-y, though segment margin (profit before interest and tax) were flat.

In the other major segment - automation and drives - segment revenues grew 40 per cent, but the margin fell 184 basis points y-o-y. In industrial solutions and services, segment margin improved by 204 basis points.

In November, the company bagged its largest order ever-the Rs 4,000-crore electrical grid from Qatar General Electricity. As a result, its order-book stood at Rs 11,040 crore against Rs 7058 crore at the end of September 2006.

There will be some pressure on the company's margins in the short-term, but analysts expect raw materials-sales ratio to decline from current levels.

Going forward, consolidated sales will decline around 10 per cent as the company exits from the enterprise networks and services business.

The Siemens stock, which trades at 33 times estimated FY07 (September year end) earnings and 20 times estimated FY08 earnings, is likely to remain expensive given the strong orderbook.