Reliance: Shining bright

Higher gross refining margins drive up operating profit.

Reliance Industries reported an improved performance in the September quarter, largely due to higher gross refining margins (GRMs) in its refinery division, on a y-o-y basis.

This resulted in a growth of 14.2 per cent in operating profits to Rs 5,781 crore, while net turnover improved 6.6 per cent to Rs 32,043 crore. The company's second quarter results include that of the erstwhile IPCL for the first time.

The merged entity reported an improvement of 120 basis points y-o-y to 18 per cent in its operating profit margins.The results were declared after the markets shut on Thursday.

The stock had closed lower by 4.25 per cent at Rs 2576 in a falling market. Prior to Thursday, the stock gained by an impressive 30.7 per cent over the past month compared with a 20.7 per cent rise in the Sensex.

RIL processed 8.09 million tonnes of crude in the September 2007 quarter, which was more or less flat on a y-o-y basis.

The company's GRMs were $13.6 a barrel in the second quarter compared with $9.1 a barrel in the corresponding quarter last year. The regional benchmark Singapore refining margin was $6.4 per barrel in the September quarter.

RIL has once again been able to do better than the regional benchmark due to its ability to process heavy and sour crude, coupled with higher product prices of petroleum products in overseas markets, on a y-o-y basis.

As a result, segment profit of the refining division rose by an impressive 56 per cent y-o-y to Rs 2,321 crore in Q2 FY08. The polymer production in the petrochemicals division was 4.95 million tonnes in the second quarter this year compared with 4.8 million tonnes in the previous year.

Analysts highlight that polymer product margins were marginally higher on a y-o-y basis due to strong domestic demand conditions and this helped RIL to offset the higher input costs.

The production was higher by 7 per cent y-o-y in the polyester business. However, segment profit of the petrochemicals division declined 3.7 per cent y-o-y to Rs 2,025 crore in the last quarter.

Going forward, the company's refining division is expected to remain the key growth driver. The company management will focus on deriving synergies with its two recent overseas acquisitions, Gapco in East Africa and Hualon in Malaysia.

The stock trades at 28.5 times estimated FY08 earnings, due to its rapid expansion in fast growing sectors such as retail and oil exploration, and should continue to be an outperformer.

ACC: Below Street's expectations

The second quarter results of the cement major, ACC were below expectations. The adjusted standalone net sales improved by 20 per cent y-o-y in the September quarter to Rs 1637 crore.

However, it fell short of Reuters' consensus estimate of Rs 1725 crore. Volume growth was good at 9.9 per cent to 4.68 million tonnes, but again below the 4.8 million tonnes expected by analysts. The increase in average realisation was just 9 per cent on a y-o-y basis.

The company's operating profits increased by 23 per cent y-o-y to Rs 448.6 crore, which was again below the estimated Rs 500 crore. The operating profit margins improved by 63 basis points to 27.4 per cent.

The company's total expenditure increased by 19 per cent, mainly because power and fuel costs as a percentage of sales went up by 350 basis points on a yearly basis.

However, the adjusted raw material costs declined by 330 basis points. Even in the June quarter, the operating profit margins had declined 280 basis points y-o-y to 29.1 per cent because of higher other expenditure.

ACC has been on an uptrend for the past two months. Till Wednesday, the stock was up by 26 per cent against the Sensex gains of 19 per cent. But it fell by nearly 14 per cent on Thursday, as results were below expectations and amid the weak markets.

The cement prices are expected to remain firm, going forward, due to the buoyant demand from the construction and housing sector.

After the big fall on Thursday, ACC trades at a more realistic multiple of about 13 times estimated CY08 earnings and is likely to be a market performer.