RIL Q1 net down 21%, not worse as feared: Five facts

Reliance Industries, the country’s largest conglomerate, reported a 21 per cent fall in the net profit at Rs 4,473 crore during the quarter ended June 2012. Analysts expected the company to do worse at Rs 4,258 crore. Reliance Industries reported a growth 13.4 per cent in sales to Rs 94,926 crore for the period. RIL managed to do better on the profit number as it made more money from the huge over Rs 70,000 crore cash pile.

Here are key facts about the company’s results:

1) Profit growth: Analysts were much more pessimistic. Reliance has managed to beat those expectations. The company generated other income of Rs 1,904 crore for the June 2012 quarter. This is 77 per cent higher than last year. The company says in the earnings statement that this was due to a higher cash balance. RIL also paid less tax at Rs 960 crore in June 2012 against Rs 1,693 crore last year. Shareholders of this company want Reliance Industries to make money through operations in the core businesses. The company’s operating profit fell 36 per cent to Rs 4,331 crore in June 2012 quarter against the year ago period. This is an improvement though from March 2012 quarter. However, shareholders need to track the growth in profitability over the next few quarters before suggesting that the operating profit at Rs 3,904 crore reported in the quarter to March 2012 was the bottom.

2) Refining business: A key metric for Reliance Industries is the gross refining margin (GRM). The GRM is the difference between the price of petroleum products and crude oil. The refining business accounts for two-thirds of the company’s net sales and 40 per cent of the company’s profit before interest and tax (PBIT). The GRM for June 2012 quarter stood at $ 7.6 per barrel. This has fallen sharply from $ 10.3 per barrel reported in June 2011 but at the same level as that in March 2012. So this indicates a flat sequential trend in profitability of the biggest business of the company. The company scored over analyst expectations of GRM at $ 6 to $7.1 per barrel. The company reported a strong 15.9 per cent growth at Rs 85,383 crore in the refining business revenue.

3) Petrochemical business: Petrochemicals is the second biggest business accounting for 27 percent of the net sales and 34.4 per cent of the profit before interest and tax. While sales revenue grew 18.9 per cent at Rs 21,839 crore, the segment profit fell 20.7 per cent to Rs 1,756 crore. The company’s profitability is under pressure here as the profit before interest and taxes as a percentage of segment revenue (PBIT margin) fell to 8 per cent from 12.1 per cent in the year ago period. This was despite an increase in production to 5.6 m tonnes from 5.5 m tonnes in the year ago period. This shows that the company has to work harder for earning profits in this segment.

4) Cash pile: Reliance has over Rs 70,000 crore cash. Analysts say that the company could earn Rs 71,000 crore over the next three years as operating free cash flow. Operating free cash flow is the difference between the operating profit and capital expenditure that the company incurs. The buyback offer announced has so far seen the company buyback shares worth Rs 2,512 crore. However, investors could be happy if the company gives a special dividend since there are no significant plans to deploy the massive cash pile of Rs 70,000 crore

5) New businesses: Analysts are not too impressed with Reliance’s foray into non-core businesses like media, hospitality. Reliance’s retail business reported a 42 per cent growth in sales at Rs 2,269 crore. However, the company has not disclosed any profit data. On the 4G broadband business, the company has not given any update. “We note that RIL’s investments in non-core businesses like Special economic zones or SEZs and retailing have not created meaningful value for shareholders,” says Kotak Securities, a Mumbai-based firm in a note in March 2012. “The SEZ business probably lost money before its termination and retailing continues to lose money,” the note added. The brokerage is not optimistic about the telecom foray, given high license fees and a competitive business environment. “Small investments in hotels and media show lack of focus, especially given limited progress in core businesses,” the note adds.