Reliance Industries Ltd (RIL) posted profits after tax, excluding exceptional items, of Rs3,882 crore—a tad higher than the Rs3,837 crore profit after tax notched up during the September quarter. Considering that net turnover has been much higher in the December quarter—Rs34,590 crore, compared with Rs32,043 crore in the previous quarter, there is obvious pressure on margins. Profit before interest depreciation and tax was 16.9% of net turnover in the December quarter, compared with 18% in the previous three-month period.
The reason lies in the petrochemicals business. Revenues from this business dipped 3.3% compared with the year-ago period and were also lower than during the previous quarter.
Volumes at 4.8 million tonnes were lower than in the September quarter, because of a reduction in volumes of polyester intermediates on account of a planned shutdown of the paraxylene unit at Jamnagar in the December quarter. Volumes of both polyester and polymer divisions have increased. Segment profits at Rs1,778 crore were 14% of segment revenues, compared with 15.6% in August-September.
But the refining business has more than made up for the tepid performance of the petrochemicals division. Not only were revenues well above what they were in the September quarter, but segment profits, at Rs2,614 crore, were 12.6% higher than in the September quarter. Profits were 10% of segment revenues, compared with 9.8% in the previous quarter. Gross refining margins rose to $15.40 (Rs605.22) per barrel compared to $13.6 per barrel in the previous quarter.
Petrochemical margins are expected to remain under pressure on account of high naptha prices. Also, considering the large capacities scheduled to come on stream, the cycle seems to have turned for the petrochemical industry. So far as the refining business is concerned, while there could be pressure on margins if global growth slows, the commissioning of the Reliance Petroleum refinery before December will add to volumes.
Only one-third of RIL’s valuation is on account of its existing businesses. Its oil and gas business, the commissioning of the Reliance Petroleum refinery, the “unlocking” of value from its retail business, and its proposed SEZ account for the rest. But, as an analyst with a foreign broking firm has pointed out, RIL’s current valuation is more than the combined valuations of Valero Energy Corp., the world’s largest pure refiner, The Dow Chemical Co., the largest petrochemical player, Anadarko Petroleum Corp., one of the world’s largest independent oil and gas exploration and production companies plus the entire Indian listed organised retail space. Small wonder the stock declined after the results.
Is Reliance Energy Ltd a major player in the power sector or an NBFC (non-banking finance company)? No, we’re not referring to the transfer of some of its power projects to Reliance Power. We’re talking about the rising importance of the company’s treasury operations. In the December quarter, the company’s other income stood at Rs347.92 crore, which included a credit of Rs60.02 crore on account of period-end revaluation of foreign exchange derivative instruments. The company’s annual report for FY07 mentions that other income is mainly made up of interest income.
The company’s entire profit before tax, however, was much lower at Rs280.01 crore. In other words, the company’s core businesses of power generation and distribution coupled with the engineering, procurement and construction business are hardly contributing to the net profit. Meanwhile, Reliance Energy shares have risen from less than Rs1,000 in mid-September 2007 to nearly Rs2,200 currently, primarily to reflect the value of its holding in Reliance Power. Note that Reliance Energy has invested all of Rs1,720 crore for its 45% stake in Reliance Power, and the stake is now valued at Rs45,765 crore at the higher end of the price band.
TCS: growth pangs
Tata Consultancy Services Ltd’s commentary after the December quarter results provided some ammunition for analysts who are bullish on the stock. The company said top clients have indicated they would increase offshoring work, the size of deals are much larger compared to a year ago, and that it’s pursuing 25 large deals, each with a size of more than $50 million.
The results for the December quarter, however, also provide fodder for bears. For one, there’s a marked slowdown in growth. Revenues grew 21% over the year-ago December quarter, after adjusting for a forex-related gain accounted in the topline. That’s lower than the 25% growth rate achieved in the preceding two quarters. Quarter-on-quarter growth in revenues has been a mere 3.7% in its international business. TCS’s chief financial officer S. Mahalingam says growth is lower because the base has become higher. According to him, “Although we would have liked growth to be higher, we are heartened by the quality of growth.” In other words, the clients added hold promise of high growth in future.
Moreover, adjusted for forex gains, the company’s operating profit has risen just 9.4% on a y-o-y basis in the December quarter, a striking deceleration. Profit had grown by 29.5% in the June quarter and by 19.5% in the September quarter. Although Infosys Technologies Ltd’s revenue growth has been much slower than TCS’, its profit growth has been steady at about 17%. Last quarter, TCS’ operating margin fell by as much as 250 basis points, at a time when its main competitor has managed to maintain margins. The answer lies in the two companies’ approach to selling, general and marketing expenses. In TCS’ case, these expenses grew by over 300 basis points y-o-y. Infosys cut them by 130 basis points.
Mahalingam sees the increase in SG&A expenses as an investment, which “will pay off at some point.” Several analysts now prefer TCS over Infosys primarily because of its aggression in adding new delivery centres and its pursuit of new clients and large deals.
While the two companies may differ on this count, what’s common for both the IT majors is that growth has begun to slow down, and that to at a time when the impact of the US slowdown has ”not yet been seen.”
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