RIL: Refining does well, petrochemicals does not

Dalal Street had factored in a better December quarter profit from RIL, thanks to the buoyant refining and petrochemicals cycle, but the Q3 results of the private sector giant exceeded even the most optimistic forecast.

Gross refining margins (GRMs) have grown 58 per cent y-o-y to $9.8 per barrel, well above Q2's GRMs of $8.2 per barrel.

And with the refining division contributing almost 54 per cent of gross turnover and 58.5 per cent of total segment profit in the December quarter, it's obviously the key growth driver.

GRMs have cooled from the levels of $10-$10.5 a barrel reached in mid-November but, improved realisations on a year-on-year levels have helped segment profit grow 93.6 per cent in the last quarter and segment profit margins improved 360 basis points to 11.76 per cent.

Domestic demand for polymers was more or less flat in Q2 FY05. However, the price cuts announced for its repertoire of polymer products in late Q3 helped the petrochemicals division grow its segment revenue 31.1 per cent. But segment profit fell 15.22 per cent, as the price of naptha, a key input, went up about 46 per cent y-o-y.

Higher naphtha prices have also been reflected in total raw material cost jumping 55.7 per cent to Rs 12, 687crore in the last quarter.

Improved performance of the refining division helped overall operating profit rise 28.2 per cent but, it could not prevent operating profit margins shrinking 200 basis points to 18.51 per cent.

Naphtha prices have cooled about 11 per cent over the last 6 weeks and going forward, that should help improve the profitability of the petrochemical division.

GRMs for Indian refiners appear to have peaked in the medium term, so further growth in Reliance's profit should be largely determined by the performance of its petrochemical division.

ITC

The story of ITC's third quarter results was one of good growth in the overall bottomline, but lower growth in top line revenue, thanks to a sharp reduction in revenues from its core cigarette business.

Revenues from cigarette sales grew 5 per cent in the third quarter, well below the double-digit growth rates notched up during the first two quarters of this fiscal.

Analysts point out that the low growth has occurred despite raising the prices of a couple of brands in Q3. What's more, revenues from cigarettes were lower in Q3 than in Q2.

However, ITC's other businesses, which account for 30 per cent of revenues, all showed improvement. The non-cigarette FMCG businesses, in particular, have shown good growth in revenues, and losses as a percentage of turnover have come down.

The move up the value chain in the paper business has increased margins. Businesses other than cigarettes contributed 12.9 per cent of ITC's profits in Q3, compared to 5.9 per cent in the same period of FY 04.

Of course, the results have been overshadowed by the Supreme Court's judgment striking down the luxury tax and that should add Rs 500-600 crore in a year to ITC's bottomline. Going forward, wth so much good news on the legal front, the market expects a hefty dividend payout.

Wipro

Wipro reported lacklustre December quarter results, with revenues of the global IT services and products division growing at just 5.9 per cent sequentially and operating income of the segment increasing by 2.7 per cent. These numbers are based on segment information given in the US GAAP results report.

Volumes of the core IT services business (excluding the BPO business) grew just 7.1 per cent, following the 7.3 per cent growth in the September quarter. In contrast, Infosys had grown volumes at 12.1 per cent and 12.6 per cent respectively in the December and September quarters.

Worse, gross profit of the global IT services and products division fell marginally owing to a 240 basis points drop in gross margin.

ESOPs issued in the September quarter had a impact on margins, while the 15-18 per cent salary hike given to offshore employees hit margins by another 200 basis points. This was partly offset by a one per cent increase in average pricing.

SG&A expenses were cut further by 100 basis points, thanks to which the drop in operating margin was restricted to 110 basis points.

Other income shot up by 112 per cent, but despite that growth in the income of the Global IT Services and Products division was just 2.7 per cent.

One of the main advantages Wipro has over other top tier players is its forward cover of $614 million, part of which has been booked at high rates much before the December quarter. This should help if the rupee continues to appreciate.

Apart from that, Wipro was amongst the first to report an increase in average billing rates, thanks to adding more value. Yet, this hasn't resulted in higher earnings relative to peers thus far. It's no wonder Wipro's valuation premium relative to Infy has now come down to just 10 per cent.

Biocon

Biocon Ltd's consolidated net profit has grown 43 per cent y-o-y to Rs 50 crore in the last quarter.

Biocon's active pharmaceutical ingredients (API) for statins (cholesterol-lowering drugs) continue to be its key products, as a result of which the bio-pharmaceuticals division grew 22 per cent to Rs 138 crore.

Sales of this division account for about 78 per cent of total sales. Unlike other product segments, statins have not yet been commoditised in the American market.

Also, its enzymes division has continued its robust performance ""- sales are up 35 per cent to Rs 22 crore owing to strong demand from user industries such as leather, food and beverage.

Operating profit of the company grew 39.5 per cent to Rs 60 crore in The last quarter and operating profit margin rose 277 basis points to 33.7 per cent. Expanding product volumes and entering new markets has been the key to growing margins.

Of course growth in its APIs for statins will be a key growth driver but the company has also been expanding its focus on the fast growing insulin market. And over the next 2 - 3 quarters revenues from this business should drive profit growth.

Holcim-GACL

The open offer document for ACC shares sheds further light on the deal between Holcim and Gujarat Ambuja.

The document points out that, according to the terms of the deal, there's a put and call option with respect of GACL's 33 per cent stake in the post-issue expanded share capital of Ambuja Cement India Ltd. GACL has the right to sell the shares anytime on or after June 30, 2005.

In case GACL does not exercise the put option, then Holcim Mauritius has the right to call the remaining shares on or after January 1, 2008.

This makes several things clear. One, GACL will exit from ACIL, and, by implication, from ACC sometime in the future.

Two, the cost of the put and call option should be added to Holcim's cost of acquisition of ACC.

Of course, much will depend on the price at which the option will be exercised, and analysts' estimates for the cost of acquisition (including the cost of options) range from $120-$150 a tonne. That is pretty steep.

Further, with the market unenthused by the offer price, and considering the fact that ACIL will go in for creeping acquisition, ACC investors would be better off holding on to their shares.

With contributions from Mobis Philipose and Amriteshwar Mathur