Fuelling growth

Petro division drives RIL's better show in Q2FY07, while the refining performance lacks lustre

The key takeaway from Reliance Industries'(RIL) September quarter results is the improved performance of its petrochemicals division, which helped the company offset the lacklustre performance of its refining business.

However, that could not prevent a dent in its overall operating profit margins, on a y-o-y basis.

The operating profit grew 23 per cent, y-o-y, to Rs 4,565 crore in Q2FY07, compared with 37.4 per cent growth in its net turnover to Rs 28,474 crore. As a result, the company's operating profit margin fell 190 basis points, y-o-y, to 17.9 per cent.

Although it is not strictly comparable, incidentally, in the June quarter too, the company's operating profit margins had slumped 278 basis points, y-o-y, to 17.27 per cent.

The results of the second quarter, however, must also be viewed in the context of flooding in several parts of the company's facilities in Hazira (western India) in the middle of the quarter. The quarterly results were declared after the close of trading on Thursday, and the stock today gained 0.5 per cent to climb to Rs 1,202.

The company's refining division processed 8.2 million tonne crude in Q2FY07 against 8 million tonne in the same quarter last year. Enhanced throughput helped the company partially offset weaker gross refining margins (GRMs), which stood at $9.1 a barrel in the September quarter vis-a-vis $10.4 a barrel last year.

Once again, RIL's GRMs were better than the benchmark Singapore refining margins, which averaged $4.75 a barrel in Q2FY07 compared with $8.1 a barrel a year earlier.

Also, under-recoveries in the auto fuel retailing division were estimated at Rs 80-90 crore in the quarter versus Rs 500 crore in the June quarter, analysts say. RIL has taken several steps in the second quarter to rationalise its dealer marketing network.

Nevertheless, the refining segment profit fell 2.8 per cent, y-o-y, to Rs 1,489 crore in the September quarter. As for the petro division, production of polymers such as polypropylene, polyethylene and PVC was up 18.3 per cent, y-o-y, to 5,63,000 tonne in, given its enhanced capacities coming onstream earlier this year.

Analysts say margins of a range of polymer products rose 27-30 per cent, y-o-y, which helped the company offset the rise in the costs of inputs such as naphtha. Its adjusted raw material costs shot up 49 per cent, y-o-y, to Rs 21, 512 crore.

The segment profit of the petrochemicals division jumped 37.9 per cent y-o-y to Rs 1,764 crore in Q2FY07. The segment is expected to remain the key profit driver going forward, given the y-o-y weakness in GRMs. The stock trades at 15.5 times its estimated FY07 earnings "� decent given the growth expected in the medium term.

Hindalco: Aluminium holds the key

Higher aluminium prices, on a y-o-y basis, helped the company turn in a better performance in the September quarter. The company's operating profit grew a whopping 102.4 per cent, y-o-y, to Rs 986.4 crore compared with 74.2 per cent growth in its net sales to Rs 4,634.2 crore.

As a result, the operating profit margins, in the quarter, jumped 300 basis points, y-o-y, to 21.3 per cent. Although, not strictly comparable, in the June quarter, operating profit margins actually fell, by 554 basis points, y-o-y, to 21.84 per cent.

In its aluminium division, the company's production of primary metal rose 2 per cent, y-o-y, to 1,09,324 tonne. However, aluminium prices on the London Metal Exchange, on an average, jumped 35.6 per cent, y-o-y, to $2,482 a tonne levels in the same quarter. As a result, the segment profit shot up 54.6 per cent, y-o-y, to Rs 671 crore in the quarter.

In the company's copper division, production of copper cathode was up 26.7 per cent, y-o-y, to 71,392 tonne. A crucial aspect is that its contract TC/RC (treatment and refining charges) realisations were pegged at 36 cents a pound in Q2FY07 compared with 20 cents a year earlier, analysts say.

The segment profit of the division stood at Rs 123.3 crore in the September quarter compared with a loss of Rs 69.2 crore a year earlier.

The direction of aluminium prices is expected to remain a key determinant of the company's growth, going forward.