RIL: Margin push, KG-D6 gas key to RIL’s growth

Margin push, KG-D6 gas key to RIL’s growth
Clarity On Future Growth Prospects Can Drive RIL Stock’s Journey Forward

THERE was hardly any surprise in the quarter to December 2010 numbers of India’s largest company by market capitalisation — Reliance Industries, including the growth in profits of 28%. But a few things stand out, like the slowdown in the YoY growth rate in revenues. In the 12-month period ended September 2010, the company’s topline growth was 73% compared with a year ago. The profit growth in the same period was just 23%, highlighting the importance of volume growth in higher profits.
The sales growth in the December quarter was just 5.2% YoY, an indication that the growth benefits of its two new mega-projects commissioned at the beginning of FY10 and gradually ramped up by the end of last year, have petered out.
In other words, there will not be much of volume growth in future to drive its bottomline. A lot will hinge on the company’s ability to improve margins and to scale up gas KG-D6 production . Uncertainty over both these could well explain the underperformance of the RIL stock over the past few months. The company’s KG-D6 gas production declined to close to 57(MMSCMD in the December quarter from close to 60 MMSCMD in the September quarter. RIL, which was originally planning to ramp up production to 80 MMSCMD, has put off the plan indefinitely, citing some geological problems. The company was also able to improve operating margins during the December quarter as both its refining and petrochemical divisions witnessed improved profitability. One could argue whether it was a decisive turn of the commodity cycle or just a lucky quarter. Although both the refining and petrochemical businesses appear to be out of the woods, margins are expected to stagnate in the coming quarters. What this means is that till the time any of its new businesses start contributing, RIL’s quarterly profits are likely to remain range-bound close to its December 2010 level. A recent report by broking firm Elara Securities, for instance, pegs the company’s FY12 expected profit growth at 10.8% higher compared with estimated profits for FY11, which is likely to grow 33% over FY10. Reliance has invested close to $3.5 billion in shale gas assets in the US, runs over 1,000 retail stores across 85 Indian cities, is putting money in exploration besides holding licences to launch broadband wireless access pan-India, among other initiatives.
However, there is little clarity on when and how much these businesses would contribute to the company’s bottomline. The RIL scrip, which gained almost 2% on Friday in a volatile market ahead of the results, is now trading at a P/E of 16.5. It is likely to drift sideways until there is some clarity on its future growth prospects.