RIL: Margin pressures

Stronger gross refining margins in Q4 FY08 fail to offset raw material pressure of the petrochemicals division

Its complex refinery, with the ability to process heavy and sour crude, has once again helped RIL report better gross refining margins (GRMs) than the regional benchmark.

However, even a GRMs of $15. 5 per barrel at its refinery"�which contributed 77 per cent of net turnover in Q4 FY 08"� couldn't offset a lower operating profit margin (OPM) of just 10.4 per cent for the petrochemicals division, which was pressured by higher naphtha prices.

As a result, the Rs 1.33 lakh crore RIL posted a fall in the OPM of 270 basis points y-o-y to 16 per cent in the March 2008 quarter, even as its net turnover rose 36 per cent to Rs 37, 286 crore.

While the company processed 8.1 million tonne of crude in the March 2008 quarter, levels similar to last year, the GRMs at $ 15.5 per barrel were much better than the $ 13 per barrel achieved last year and also higher than the regional benchmark Singapore margin of $ 6.9 per barrel. Strong global prices for petroleum products like gasoline and aviation turbine fuel have also helped.

Thus refining profits rose nearly 25 per cent y-o-y to Rs 2,839 crore in Q4FY08, which helped its overall net profit rise 24 per cent y-o-y to Rs 3,912 crore broadly in line with expectations.

However, naphtha prices played spoilsport averaging $ 850 per tonne in Q4 FY 08, way above the $ 580 per tonne a year back. RIL has not been able to pass on the increased costs to customers.

As such, while the production of polymers was higher by 7 per cent, profits rose just 6.2 per cent to Rs 1466 crore. At Rs 2642, the stock trades at 24 times estimated FY 09 earnings and should be an outperfomer given the company's rapid expansion in oil exploration and the retail space

Axis Bank: Growth could slow down

Axis Bank's net interest margins for the March 2008 quarter have remained flat on a sequential basis at 3.93 per cent with the cost of funds having gone up marginally to 5.82 per cent.

The bank's cost of funds was relatively low even in the December quarter because it raised Rs 4,534 crore in September 2007 quarter, gaining about 25-30 basis points.

Nonetheless, Axis Bank's March quarter numbers are impressive with pre-provisioning profits up 82 per cent y-o-y to Rs 723 crore, driven by a 67 per cent rise in the fee income and an 89 per cent rise in the net interest income.

With provisions for marked-to market losses, incurred by clients on forex derivatives losses, lower than anticipated at Rs 72 crore, the net profit for the quarter was up 71 per cent at Rs 361 crore. Not surprisingly, the stock rose nearly 7 per cent on Monday to close at Rs 881.

The bank has a tremendous track record: the core lending business has grown at a compounded 50 per cent over the last five years, albeit on a low base, while fee income has grown at a compounded 56 per cent.

But loan growth could slow down; already retail credit market has lost momentum while the equity markets are volatile. So the bank might just not sustain the kind of retail fees growth it has seen "�retail fees contributed 43 per cent of total fee income in FY08.

Besides with the volume of derivatives coming off, revenues from forex could be squeezed. Also, while the bank's balance sheet is relatively clean, with net non-performing assets down to 0.36 per cent at the end of March 2008 from 0.61 per cent last year, it does have some exposure to sectors such as real estate-7 per cent of the corporate loan book and housing finance companies and other NBFCs, about 11 per cent.

At Rs 881, the stock trades at just over 3 times FY09 price to estimated FY09 book value and is not cheap.