Reliance: Refined numbers

The refining business boosts bottomline for Reliance

Reliance numbers for the quarter ended June 2005, were a trifle better than what the Street expected and the stock today touched an all-time high over Rs 700. The company's top line growth of just under 25 per cent has come more from a rise in the prices of its products rather than an increase in volumes sold. In fact, production of oil, gas and petrochemicals remained flat at 3.18 million tonne.

Analysts say that gross refining margins (GRMs) have been reasonably strong and are up around $1 y-o-y from about $7.5 in Q1FY05.

In the refining segment, the company has therefore gained not only from higher revenues but also from higher margins. However, the petrochemicals cycle remains intact, with prices reasonably firm in spite of the lower import duty on polymers, which should have impacted margins.

In the petrochemicals segment, revenues were up 3.1 per cent, while profits were lower than in the corresponding period of the previous year, implying a hit on margins. Thanks to better realisations and also a control on costs, the company has managed to up its operating profit by 27 per cent.Raw materials as a percentage of sales remained flat at 67.7 per cent. The operating margins though went up just about 45 basis points.

Net profit and, consequently, earnings have received a boost from the significantly lower interest paid out (down nearly 50 per cent) as also lower depreciation. The lower depreciation has resulted partly from the sale of assets in the last fiscal. The other income, however, was lower since the company has exercised its option to convert the preference shares of Reliance Infocomm. At Rs 700, the stock discounts FY06 expected earnings by about eleven times.

Tata Tea

The point about Tata Tea's first quarter results is that it has been able to expand its top line by 8 per cent in spite of the sale of several of its South Indian estates during the period.

What's more, this increase in revenues has occurred at a time when tea prices have been falling. The reason is simple""-branded tea volumes rose by 16 per cent year-on-year.

Moreover, the management has also pointed out that its plantations in the north-east are profitable, and what has been lost in tea prices has been gained in volume. The company was able to increase tea production by buying green leaf from neighbouring gardens.

For consolidated operations, however, income from operations has remained flat, mainly because of severe competition in the British market. The management points out, however, that it did not drop its prices despite the competition, and as a result operating margins have been firmer. Operating profits for the consolidated operations are up 5.9 per cent y-o-y. For the standalone company, operating profit growth was even higher""-at 19.6 per cent, with lower staff costs due to the sale of the tea estates contributing to the profit.

The bottomline was also boosted by the profit on sale of the estates, and , for the consolidated entity, by an a change in the way the company accounts for its pension liabilities. The good news is that the current quarter too should see profit on account of exceptional items, with Rs 50 to Rs 55 crore being likely to be realised from the sale of a few more tea estates to Tata Coffee.

To be sure, tea prices are likely to be weak this year, but that will benefit its branded tea. And since its brands make up 90 per cent of the cosnolidated entity's operations, the company as a whole benefits from lower tea prices. In addition, the end of the strike, affecting four of the company's estates in North Bengal, is good news.

With contributions from Shobhana Subramanian and Mobis Philipose