Reliance Industries Ltd, or RIL, has declared earnings of Rs105 a share for fiscal 2008 that ended 31 March, Rs1.48 higher than consensus estimates. When a stock reports earnings each quarter, the analysts who follow that stock will each have their own earnings estimate for the company’s quarterly results. The average of all these forecasts is known as the consensus estimate.
RIL’s revenue as well as operating profit growth in the March quarter were higher than for the full year. While year-on-year revenue growth in the March quarter was 32% and growth in operating profits was 19%, for fiscal 2008 as a whole, the rise in revenues was 18%, which was also the operating profit growth. Operating profit is revenue from a firm’s regular activities less costs and expenses and before income deductions.
Growth in the refining segment, which accounted for 63% of gross turnover in fiscal 2008, was driven by revenues, with a 36% rise due to significantly higher product prices. In volume terms, too, exports of refined products were much higher than in the same period the previous year.
The company’s gross refining margin was at $15.5 (around Rs618) per barrel against $15.4 per barrel in the preceding quarter. Interestingly, it maintained gross refining margins despite Singapore refining margins falling from $7.7 a barrel in the December quarter to $7 a barrel in the March quarter.
The refining segment’s earnings before interest and tax, however, increased by 25%, well below the fiscal 2008 rate of growth of 34%. It was because earnings before interest and taxes, or Ebit, margins for the segment in the fourth quarter were 9.9%, compared with 10.3% for the entire year.
Margins in its petrochemicals business continued to remain under pressure because of higher feedstock prices. While segment revenue rose 12% during the quarter, segment earnings before interest and tax increased by just 6%. Duty reduction on polyester, PTA (purified terephthalic acid) and MEG (monoethylene glycol) hurt the company, with segment Ebit margin falling from 14% in the third quarter to 10.4% in the fourth. Production volumes, however, were higher by 4-10% in the various petrochemical businesses.
Looking ahead, the main driver will be production from KG-D6 field off India’s east coast, which is expected to commence production this fiscal and double India’s gas production in financial year 2010. The acceleration of the exploration programme by using additional rigs this year is another positive.
The commissioning of the Reliance Petroleum Ltd refinery will also be a trigger. In other words, strong volume growth will buttress RIL’s earnings.
At consensus estimates of Rs121.87 for fiscal 2009, the stock trades at a forward price-earnings multiple of 21.6. However, earnings per share for 2007-08 was higher by 26.8% after adjusting for exceptions.
Satyam Computer: squeezed on margins
Satyam Computer Services Ltd’s March quarter results are far superior to all of its peers in the large-cap space. The company has beaten its peers in terms of revenue growth for most of the year, but, in the March quarter, it did well on the profit growth front as well. On a year-on-year basis, revenues grew 35.8% and operating profit rose by 36.8%. In comparison, Infosys Technologies Ltd’s revenues grew by 20% and profit grew by 25.6%.
In the previous three quarters, Satyam had beaten Infosys handsomely in terms of revenue growth, but its profit growth was either the same or lower because of margin pressure.
For the year as a whole, Satyam’s revenues grew by 30.7%, but operating profit rose just 20.2% as margins fell by nearly 200 basis points. Infosys’ revenues grew at a much lower rate of 20.1%, but it maintained margins and profit also grew at almost the same rate.
The sharp drop in Satyam’s margins last year is perplexing. Its volume growth has been much higher than peers, the increase in its billing rates has also been among the highest, utilization rates have been increased the most, there has been a large shift in work offshore and subsidiary companies have done much better. True, the rupee appreciated by about 11% last year but, that was true for the whole industry.
The only explanation seems to be Satyam’s higher-than-industry salary increases. The company’s employee costs are already at a relatively high level, and the higher-than-average wage hikes seems to be worsening matters. Apart from the wage hikes, Satyam has also introduced other monetary benefits such as staggered cash bonuses and restricted stock units.
All this has helped contain attrition, but it has also resulted in employee costs rising to as much as 62.1% of revenues (59.5% last year). Infosys’ staff costs stood at 53% of revenues last fiscal.
Satyam plans to increase wages at rates that are slightly higher than industry even in fiscal 2009 and expects margins to fall by about 50 basis points as a result. Note that utilization rates excluding trainees reached exceptionally high levels of 83% last year. It’s likely that this may come down and put pressure on margins.
But, if the last few quarters are any indication, revenue growth is likely to be higher-than-industry for another year. The guidance estimates for the year are not much higher than that of Infosys, after adjusting for the impact of acquisitions, but it won’t be surprising if Satyam end the year with a much higher growth rate.
At the beginning of the last fiscal it had said revenues will grow by 30% in dollar terms, but ended the year with 46% growth. The high revenue growth has excited the markets, leading to strong outperformance by the stock.
A year ago, Satyam traded at a 25% discount to Infosys’ trailing price-earnings multiple—this has halved to about 12%, thanks to superior revenue growth. But, if margin pressure continues like it did last fiscal, the markets may do a rethink on Satyam’s valuations.
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