India’s most valuable company Reliance Industries Ltd posted a 14% year-on-year rise in net profit for the quarter ended March 2007 to Rs2,853 crore, but analysts forecast testing times ahead for the company because of the rising rupee and intense competition in the petrochemicals business.
Sales for the quarter ended March rose just 4% to Rs27,339 crore.
The company’s revenue for 2006-07 rose 24% to Rs1,10,886 crore but net profit for the year grew only 20% to Rs10,908 crore, an indication of declining profitability. The company posted an earnings per share of Rs78.3 for the year which translates into a price to earnings multiple of 20.39 as compared to the average price to earnings multiple of over 21 for the 30 companies that make up the Bombay Stock Exchange’s Sensex index.
The Reliance stock ended Thursday down Rs3.10 to Rs1,596.75 on the Bombay Stock Exchange. The company declared its results, which exceeded consensus estimates of analysts, after the market closed.
Exports constituted 70% of Reliance’s revenues for the year and a rising rupee could erode the company’s profit. Reliance also faces tough competition in its petrochemicals business which accounted for almost a third of revenues for the quarter ended March 2007. Despite revenues in this business rising 21% for the quarter ended March, the operating profit margin (operating profit expressed as a percentage of revenue) declined to 10.7%, compared to 12.1% for the corresponding quarter in 2006. The contribution of petrochemicals to the net profit of India’s only private sector Fortune Global 500 company fell 23.59% to Rs1,137 crore for the quarter.
Reliance’s performance, however, was boosted by its refining business which saw profits rise 30.78% to Rs2,277 crore for the quarter ended March. “Reliance’s margins were almost a dollar above our expectations,” said an analyst at a leading foreign brokerage who requested that he not be identified, citing company policy.
Reliance’s gross refining margin grew 25% year-on-year to a record high of $13 per barrel of crude oil that it refined into high-value petrol and diesel. Analysts said the annual increase in refining margins that usually happens in April and May due to strong gasoline demand in the US was unlikely this year; the rupee’s appreciation, they added, would eat away any rise in margins. “Reliance has traditionally enjoyed an extra premium of between $4 and $5 per barrel over the benchmark gross refining margin which stood at $6.8 per barrel. This benchmark has now risen to $7.5 per barrel but the rupee has appreciated from around 44 to a dollar to almost 41 to a dollar now, reining in incremental gains in the current quarter,” said an analyst at a US-based brokerage who did not wish to be identified.
The rise in price of key inputs such as naphtha, used by Reliance to manufacture petrochemicals (that are used to make plastics), manifested itself in the 15.29% increase in the cost raw materials to Rs18,696 crore for the quarter ended March.
With petrochemical margins expected to decline (as imports become cheaper with an appreciating rupee) and the appreciation of the rupee holding back growth in refining profits, all eyes are now on Reliance’s famed operating efficiency to help increase capacity utilization and boost revenues and profits. Reliance has already reduced the capital employed in its petrochemicals business by 10.41% (Rs3,234 crore) in 2006-07. Some analysts, however, were confident that the company would manage to get things back on track even in the petrochemicals business. “Doesn’t matter which way things will go,” said Chakri Lokapriya, who manages $275 million of Indian stocks at BNP Paribas Asset Management UK Ltd in London, “Reliance will gain. They have obviously done a splendid job of spreading their risk.”
The company has also upped its capital expenditure on the exploration and production business by 160.46% to Rs5,725 crore in 2006-07, to power its efforts to find new reserves of gas and oil.
India’s largest private sector holder of exploration and production blocks is expected to start commercial production of natural gas from its Krishna-Godavari basin field by mid-2008.
Reliance is also proceeding with the rollout of its retail business. While businesses such as exploration, retail and special economic zone development (the company is developing two, one each in Haryana and Maharashtra) can help the company diversify its risk, the flip side is that they are also capital intensive.
The rapid growth of these and its core business could stretch Reliance’s finances, according to Jon Thorn, who manages $250 million in Indian stocks at India Capital Fund in Hong Kong. Reliance plans to spend $25 billion on retail, energy and petrochemicals. “It’s like going into a long tunnel,” said Thorn. “We have to see how much light there is at the end of the tunnel because implementing all these (projects) won’t be easy. They involve a lot of money,” he added.
Bloomberg’s Manash Goswami and Archana Chaudhary contributed to this report.