The crude has cooled very rapidly and even broke the $120/- support. The Global markets rallied in celebration particularly the Asian pack.
The Nifty has made a decent bottom support at 4050 level and temporarily not likely to go below 4240 the first support.
The inflation figures though not exuberant as well not threatening.
The upward movement has been cooled, likely to see some healthy correction in case tomorrow Nifty fails to trade above 4485. the immediate bottom support at 4362-65 level. The RCOM was battered but did not break the support at 493 and Bharti stayed above 785. The Reliance stayed above 2280 level, anticipation of good results, which were delivered in the evening and the street verdict is awaited. The RPL todya also failed to stay above 174 level.
The reality sector showed some resilience from the big boys like DLF, Unitech and JP. The lone sector that corrected a bit more is the banking sector along with the meltdown in metal scrips.
The fertilizer scrips like RCF, Nagarjuna, GNFC and Coromandal registered 10-20% up move. The appreciation of rupee impacted the tech scrips like TCS, Tech Mahindra, Styam and Infy. This is a good opportunity to park the liquid cash in the tech majors for reasonable relatively assured returns.
The Bharti results failed to cheer though they are good numbers but Idea needs some good ideas to increase the bottom line.
Thursday, July 24, 2008
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Jul 25, 2008 12:40 pm
RIL - FEAR OF WINDFALL TAX KEEPS MARGINS LOWER?
By SP Tulsian
When the largest private sector company of India and the operator of the third largest refinery of the world announces its results, naturally, everything else takes a back seat. There have been analysis and more analysis, leaving everyone a little bewildered. We have made an attempt here to simplify the result analysis as much as possible, making it easier for all to understand. On reading the actual fine print, or “reading between the lines” as is often said, we have presented some nuances which you might have hitherto not come across. The results are the same but we have just looked at it differently. And that has made all the difference!
Refinery disappoints:
Reliance Industries Ltd. (RIL) posted its June 08, quarter results with PAT of Rs.4,110 crores against Rs.3,912 crores achieved in March 08 quarter. Historically, RIL presents its quarterly results comparing it with the comparable quarter of the previous year, which may present the distorted picture, due to dynamic nature of crude price movement and more especially, in this quarter, where prices have gone up by about 25%, on an average, over the immediately preceding quarter. So we thought it proper to compare the results on quarter on quarter basis, rather than year on year.
Total income of the company for the quarter is placed at Rs.41,805 crores against Rs.37,575 crores of March 08 quarter, recording a growth of 11.26%. Due to sharp rise in crude price, realization ought to have improved at a similar ratio but lower growth implies that probably the company may have entered into forward contracts for its finished products of Refinery.
EBIT rose to Rs.5,196 crores against Rs.4,927 crores registering a growth of 5.45% while PBT is placed at Rs.4,902 crores against Rs.4,655 crores, recording a growth of 5.31%. PAT is placed at Rs.4,110 crores against Rs.3,912 crores, recording a growth of 5.06%. EPS also improved by 5.06% from Rs.26.91 to Rs.28.27 for the quarter.
It seems that the results of the quarter were presented with caution without incorporating the inventory gain as also better gross refining margins, on the fear of attracting attention of the government to compel them to present a case to levy Windfall Profit Tax.
Let us analyse the segment wise results :--
Petrochemicals
This segment had a gross turnover of Rs.14,871 crores for June 08 quarter against Rs.14,119 crores for March 08 quarter registering a growth of 5.33%. EBIT for the quarter is placed at Rs.1,579 crores resulting in a margin of 10.62% against 10.38% of March 08 quarter, having an incremental margin of 24 bps. Margin of this segment for Q1 of FY 08 was at 13.66% while for Q2 at 15.62% and at 13.99% for Q3. Due to increase in naptha and crude prices, segment was unable to pass on the increased cost, which has resulted in lower profit on relative terms for last two quarters of FY 08 while lower profit on absolute terms for Q3 and Q4. But sequentially, this division has performed better inspite of having adverse apprehensions.
Oil & Gas and Other –
This division represents income of 30% share of sale of Oil and Gas from Panna – Mukta and Tapti field. Panna Mukta produced 3,21,600 tonnes of crude oil and 353 MMSCM of natural gas, which is 30% and 27% lower, over its corresponding quarter of the previous year. RIL share of same was at 96,480 tonnes of crude oil and 106 MMSCM of natural gas. Tapti Block however produced higher gas of 1,133 MMSCM and 77,400 tonnes of condensate registering a growth of 97% and 133% respectively. RIL share is 340 MMSCM of gas and 23,220 tonnes of Condensate.
Due to better product realization, this segment had total income of Rs.911 crores against Rs.1,170 crores of March 08 quarter while EBIT is at Rs.512 crores against Rs.456 crores. Higher EBIT is despite lower topline, due to better product realization.
Refinery
This segment has posted below expectation results, inspite of better GRM and higher crude processing.
Refinery during June 08 quarter operated at 98.50% processing 8.13 million tonnes of crude which is about 58.90 million barrels. This segment had a turnover of Rs.32,587 crores which implies realization of Rs.5,533 per barrel or US $ 133 per barrel calculated with exchange rate of U.S. $ at Rs.41.50. Average rate of crude during the quarter was between $ 125 to $ 135 per barrel and this kind of realization for finished products indicates that the company may have entered into forward contracts at the lower rates.
The refinery operated at 98.50% for the June 08 quarter, against 97% of March 08 quarter which has resulted in an extra processing of about 9 lakh barrels of crude oil. Calculating the same with GRM of $ 15.70 per barrel results in an extra margin of Rs.60 crores.
GRM which was at $ 15.50 per barrel for March 08 quarter rose to $ 15.70 per barrel and this extra GRM of 20 cents results in an extra EBIT of Rs.50 crores.
During March 08, EBIT of this segment was at Rs.2,839 crores while the same is at Rs.3,040 crores for June quarter, giving an extra EBIT of Rs.201 crores. So, Rs.60 crores came via higher output, Rs.50 crores via better GRM while Rs.91 crores from weak rupee. So, where is the effect of inventory gain as the company must be carrying crude of 10 – 15 days ?
Even residual product of the Refinery like sulphur has risen by over 15 times in the last 18 months. Since RIL is processing heavy crude with high sulphur content, even residual products have been giving better realization, thus improving the margin of the segment. This may result in about Rs.50 crores extra margin for the quarter.
GRM of RIL refinery having Nelson Complexity of 11.7, is generally seeing a rise of 2/3rd, in relative terms of rise in crude price. It is estimated that crude price rose on an average by 24% during the June quarter which should give a 16% rise in GRM over what RIL had for March quarter. During March 08 quarter, it was at $ 15.50 per barrel which works out to $ 18 per barrel, if calculated on this basis. Strangely Chennai Petroleum had a GRM of $ 15.90 for June 08 quarter which has Nelson Complexity in single digit, but second best after RIL.
So it is certain that Refinery segment has not performed as per expectations, which may be fearing imposition of Windfall Profit Tax. This treatment would help RIL in maintaining its GRM even in case of falling crude scenario, which we are witnessing now.
Others –
RIL has not given any “Effect of change in Foreign Exchange Rates” as required by Accounting Standard (AS – 11) which has resulted in a loss of Rs.940 crores and if the effect would have been given PAT, would have been lower by this amount. The same treatment was given by RIL in past even when it had gain from such Exchange Rate Variation.
RIL would commence gas production from KG – D6 Block by October 08, but expeditious settlement of RNRL claim needs to be done by RIL.
With an EPS of Rs.28.27 for the quarter, FY 09 EPS from existing business is estimated to be Rs.120. With Reliance Petroleum likely to commence trial by October 08 and commercial production by December 08, would have 4th quarter of full working. Similarly, K G Basin would start gas production from October 08, maybe with 25 MMSCMD which would rise to 40 MMSCMD to 80 MMSCMD by December 08 and March 09. So, both this business, with RIL having 70% interest in Reliance Petroleum Refinery and 90% interest in K G Basin Gas Block may give an additional EPS of Rs.30. With this, EPS of FY 09 can expected to be Rs.150. However, the same could be close to Rs.240 for FY 10 due to full working benefits available to RIL from RPL Refinery and K G Basin Gas production which is eventually likely to rise to 120 MMSCMD.
A good analysis available to our readers. Thanks.
The key driver of our index has such potential to give an EPS above 250 then the SENSEX will be at ?. The remaining stocks automatically ride the boom derived out of such expotential groeth.
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