RIL nos partly justify valuations

RIL nos partly justify valuations
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First Published: Mon, Jul 30 2007. 12 03 AM IST

Updated: Mon, Jul 30 2007. 12 03 AM IST
Reliance Industries Ltd’s growth numbers look impressive—revenues increased 14.4% and net profit grew by nearly double that rate. Operating margin improved by about 120 basis points, thanks to higher profitability in both the refining and petrochemicals businesses.
But it must be noted that the company’s refinery as well as a cracker plant went through a planned shutdown in the year-ago June quarter, leading to a slightly low base, both in terms of volumes as well as profit margin. Owing to the shutdown in May last year, capacity utilization of the refinery was low at 91%. But this time around, the operating rate was as high as 97%, thanks primarily to a global shortage of refining capacity and strong demand for transportation products. The demand-supply mismatch led to record refining margins of $15.4 (about Rs624)/barrel for the company, 24% more than year-ago margins.
Last year’s low base does not mean that Reliance Industries Ltd’s operating performance wasn’t strong last quarter. Refining margins rose 18% even compared with the March quarter. (This did not come as a complete surprise, after Bharat Petroleum Corp. Ltd reported record margins of $7/barrel, also on 27 July). As a result, profit of the refining and marketing division grew 12% sequentially despite a 1% drop in volumes. The petrochemicals business saw profit jumping 30.3% sequentially, owing to strong demand and better prices.
Thanks to the lack of significant capacity additions coming up, the company expects petrochemicals margins to remain stable in the near-term.
As far as the refining business goes, analysts point out that although world refining margins softened earlier this month, Asian refining margins continue to be strong and are expected to remain so for the rest of the calendar year. In any case, after Reliance reported its record margin of $15.4 last quarter, there could be some earnings revisions.
But whether that will translate into a jump in the company’s share price will depend on how the markets open on Monday.
Besides, the refining, marketing and petrochemicals businesses—which the results represent—account for less than 50% of the firm’s current valuation. The rest comes from the company’s many oil and gas discoveries, and new business initiatives such as retail and its holding in subsidiary companies.
The recent rise in Reliance’s valuations have been on account of the new discoveries and the strong demand environment for refining companies. While the results prove that part of the expectations have come out true, concerns on the price discovery for its gas and the uncertainty relating to the case with Reliance Natural Resources Ltd remain.
SBI beats street
State Bank of India’s (SBI) standalone net profit growth of 78.6% compared with the year-ago period is partly the result of a writeback of investment depreciation, and growth at the operating profit level was a more muted, albeit commendable, 30.8%.
The bank was able to improve interest margins, with interest expended as a percentage of interest earned lower in the June quarter than in the preceding one. Net interest margin, after adjusting for the increase in reserve requirement, was higher in the June quarter than in fiscal year 2007. The rise in the bank’s yield on advances has been well above the rise in deposit cost.
Net interest income was up a tepid 15%, but that was compensated by increased fee income, higher profit on sale of investments and “other income”. Expenses were kept firmly in check, rising by a mere 5.8%.
Asset quality, however, deteriorated, in line with trends in the industry. Gross non-performing assets (NPA) rose by 7.6% over the end-March figure, a very rapid increase. Even after making higher provisions, net NPAs rose 4.7%.
The bank’s advances increased by 28.9% year-on -year, a rate of growth higher than the industry average of 23.4%, indicating the bank is achieving its objective of increasing market share in advances. But deposit growth has been lower than the industry average.
With the ongoing boom in companies adding capacity, SBI should find little difficulty in growing its topline. The turn in the interest rate cycle will also provide a boost, while the results have shown that margins have not only been protected but have improved. The bank’s operations are showing signs of improvement and, since it is a play on the Indian economy, it should be one of the first stocks to recover from the recent carnage.
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First Published: Mon, Jul 30 2007. 12 03 AM IST