Reliance: Margins boost

Strong gross refining margins buoy quarterly numbers

The key takeaway from Reliance Industries March 2007 quarter is that strong growth in its gross refining margins (GRMs) on a y-o-y basis in the refinery division, helped the company beat Street expectations.

As a result, operating profit grew 16.1 per cent y-o-y in Q4 FY07 compared with 5.5 per cent growth in net sales. Operating profit margin also improved 160 basis points y-o-y to 18.1 per cent in the last quarter. Over the past three months, the Reliance stock has gained 16.5 per cent during this period compared with a more or less flat Sensex.

In its key refining division, the company processed 8.1 million tonne of crude in Q4 FY07, which was nearly 4 per cent higher y-o-y. Once again, Reliance's GRMs were significantly higher than the regional benchmark Singapore refining margins in Q4 FY07 "" the company's GRMs were at $13 per barrel compared with the benchmark $6.8 a barrel.

Reliance's GRMs were $10.4 per in Q4 FY06 and $ 11.7 in Q3 FY07. Analysts point out to superior GRMs for Reliance in the last quarter, thanks to average global crude oil prices in Q4 FY07 that were lower on y-o-y basis, coupled with higher product prices.

As a result, segment profit of refining division grew 30.8 per cent y-o-y in the last quarter, while petrochemicals segment profit declined 23.6 per cent y-o-y.

No doubt, polymer margins have improved by an estimated 15-17 per cent y-o-y in the last quarter, but analysts also point out that the company had to grapple with lower margins on polyester intermediates such as PTA and MEG.

The Reliance Industries stock trades at 18.5 times estimated FY08 earnings, given its expansion in fast growing businesses such as oil exploration and retail.

ABB: Sound engineering

For ABB, it was yet another quarter of a powerful performance. The strength of its past order-book and the boom in power and automation businesses resulted in all its segments doing well. ABB's numbers were in excess of analysts' expectations and, as a result, the stock gained 1.3 per cent on Thursday.

ABB's net sales grew 63 per cent y-o-y to Rs 1312 crore in the March 2007 quarter, and its operating profit was up 84.6 per cent to Rs 128.2 crore.

Though raw material costs increased by 120 basis points, the company managed its staff costs (up 26 per cent) and other expenses (up 53 per cent), so that the operating profit margin was not adversely impacted.

Operating margin was up 112 basis points to 9.77 per cent. Its order book has gone up by Rs 2,000 crore in the March quarter with orders from power utilities and industries such as cement, steel and paper. At the end of the quarter, its order-book was up 26 per cent q-o-q at Rs 4,260 crore.

While power products division revenues improved by 84 per cent, the margins in power systems went up by 128 basis points. With strong demand for its products and services from the infrastructure sector, the company should continue its growth momentum.

The ABB stock has appreciated 14.2 per cent in the past month against the Sensex gain of 8.4 per cent. It trades at about 34 times estimated FY07 earnings and 26 times FY08 earnings, given its strong growth prospects.

Reliance Energy: Cost factor

Reliance Energy's performance in the March 2007 quarter was adversely affected by a rising cost base in its key electrical energy division.

As a result, operating profit declined a staggering 69.2 per cent y-o-y to Rs 59.75 crore in Q4 FY07 compared with 54.9 per cent growth in net sales to Rs 1614.25 crore. Operating profit margin also declined a whopping 1490 basis points y-o-y to 3.7 per cent in the last quarter.

The company sold 2129 million units of power in Q4 FY07, a growth of 6.1 per cent y-o-y. However, its purchase of energy also jumped 31.4 per cent y-o-y to 1037 million units in the last quarter. Reliance Energy's realisations were estimated at Rs 4.24 per unit, a growth of 6.3 per cent y-o-y.

Analysts highlight that the company was not able to fully pass on the cost of electrical energy purchased, which jumped 69.6 per cent y-o-y to Rs 428.5 crore in the last quarter. As a result, segment profit of the electrical energy division dropped 92.8 per cent y-o-y to Rs 7.29 crore in Q4 FY07.

A small cushion to margins was provided by the segment profit of its EPC and contracts division, which jumped 454.4 per cent y-o-y to Rs 66.09 crore in the last quarter. In FY07 too, the company's operating profit margin dipped 940 basis points y-o-y to 8.4 per cent.

The company's margins are expected to improve with the MERC permitting tariffs in suburban Mumbai, subject to certain conditions. The stock trades at a reasonable 15 times estimated FY08 earnings.