RIL: Feeling the pinch

RIL was adversely hit by a 45.75% drop in profit of key refinery business

Reliance Industries (RIL) has seen its operating profit margin decline by 213 basis points to 16.38 per cent in the December 2005 quarter. Operating profit, too, declined 9.54 per cent to Rs 2,976 crore in Q3 FY06.

The company was adversely affected by a 45.75 per cent y-o-y decline in the segment profit of the key refinery business to Rs 856 crore. Segment profit margin of the refinery division, too, declined 613 basis points to 5.63 per cent in the December quarter.

The crude processed by the refinery division fell 15.72 per cent to 6.7 million tonne and that's because of the planned maintenance at some units at its Jamnagar refinery for a 50-day period.

Also, the company's gross refining margin fell to $9.1 per barrel, as compared to $9.8 per barrel in Q3 FY05. Benchmark Singapore refining margins have also eased considerably in the last quarter.

In addition, analysts highlight that the company's discount to downstream players is understood to have grown in Q3 FY06. The company's discount to oil marketing companies amounted to about Rs 300 crore in Q2 FY06.

To the company's credit, segment profit of the petrochemical business expanded 24.88 per cent to Rs 1,064 crore, despite a 6 per cent fall in production of several polymers owing to the planned shutdown.

It does appear that the hike in polymer prices during the last quarter has helped to offset higher input costs. Segment profit of this division, too, expanded 233 basis points to 14.47 per cent in Q3. Although Reliance declared its results after the markets closed, the stock declined 1.8 per cent to Rs 893 on Tuesday.

Global markets: contrasting trends

On Monday, the Dow Jones broke the 11,000-point barrier, which had eluded the index since June 2001. In December 2004, the Dow went as high as 10,895 points and in November 2005, it touched 10,997.5 points. But in both cases, the rally fizzled out.

Academics have observed the 'January Effect' in the US markets since 1900, where stocks tend to rise in January, as investors choose to sell stocks in December to claim capital loss.

Other observations that have been made as part of the January Effect are that stocks tend to do better in January compared to most other months, and that January sets the tone for that year's stock market performance.

Whether the January Effect will work this year is anybody's guess, though some statistics suggest that one or the other form has been observed in 70 per cent of the years since 1900.

On Tuesday, other global markets failed to follow the Dow and several markets in Asia and Europe were hit by profit-taking. With the Fed likely to stop hiking interest rates in the near future, the US markets could see higher investor interest.

If the bullish sentiment continues in the US, it is likely to cheer other global stock markets, many of which have anyway been making new highs.

HDFC Bank: on a firm ground

HDFC Bank has turned in a splendid set of numbers for the December quarter. Driven by asset growth of over 45 per cent, HDFC Bank has earned a net interest income of Rs 670.6 crore in the quarter, an increase of 52.4 per cent y-o-y, far stronger than in the September quarter.

As in the September quarter, retail loans have been the faster growing segment having risen 75 per cent y-o-y. As a consequence, the retail portfolio now accounts for 54 per cent of the loan book, compared with 52 per cent in the September quarter.

The increase in net interest income together with a 47.7 per cent y-o-y increase in other income has helped the bank post net revenues of Rs.966.7 crore in the December quarter, a growth of 51 per cent y-o-y. Operating profits were up 43 per cent y-o-y at Rs 517.62 crore, despite a 61 per cent increase in operating costs.

The bank has posted a 31 per cent increase in the net profit and the net interest margin at 3.9 per cent was up 20 basis points from 3.7 per cent in Q3 FY05, though it was flat compared with the September quarter.

Higher borrowing costs in the December quarter appear to have stymied margin expansion. However, the bank has managed to contain its cost of deposits, compared with December 2004, despite an increase in the rates for fixed deposits.

That's because it has managed a huge increase in savings deposits of 40 per cent y-o-y as in the September quarter.

Net non-performing assets are up marginally to 0.4 per cent of net advances compared with 0.3 per cent in December 2004, though gross NPLs are flat at 1.4 per cent. The stock trades at 3.74 times FY07 estimated price to book and though not inexpensive, should continue to do well.

With contributions from Amriteshwar Mathur and Shobhana Subramanian