RIL’s Q2 Other Income Falls, But Still Too High

Changes in balance sheet or asset creation seen as more relevant to driving the company’s future growth

The earnings of Reliance Industries in the quarter to September were in line with analyst expectations and devoid of any surprise. As India’s second most valuable company maintains stability in its quarterly earnings, the changes in its balance sheet or asset creation will be more relevant to drive future growth. 

RIL has once again embarked upon an aggressive capital expenditure programme after it had added assets worth nearly . 25,000 crore in FY08-09. In the six-month period to September 2013, the company has already incurred a capital expenditure of . 20,154 crore, overshooting its FY13 capex of . 19,041 crore.
The higher capex has led to the company’s debt rising 16% from . 72,427 crore in March 2013 to . 83,982 crore at the end of September this year. The company continues to retain its cash-rich status However, the excess of cash over debt has dropped from . 10,548 crore at the end of March 2013 to 6,558 crore at the end of September this year.
In the September quarter, RIL reported a weaker performance in the refining segment with lower refining margins, while the petrochemicals division posted a robust performance, negating the impact of the lower refining margins. Other income, or income from sources other than the core business, at 2,060 crore were substantially lower compared to 2,535 crore in the quarter to June. This means the non-operating income now contributes just 30% of the company’s pre-tax profits as compared to 38% of previous quarter. This may be considered good for the company since the proportion of operating businesses in overall profitability has gone up. However, other income’s influence on profitability is still too high.
The company reported a sharp drop in polymer demand growth in India to just 1% year-on-year in the July-Sept quarter from 15% of April – June 2013. Growth was subdued and the anticipated festive season demand did not materialise fully, said a company release. Such a subdued demand growth, if it persists, could stoke concern, especially in view of capacity additions which the company is planning.
The results are unlikely to provide any direction to the company’s stock price, since they met most analyst estimates. “There was no surprise in RIL’s numbers. The markets have already factored in the results,” said Dhananjay Sinha, head of research with Emkay Global Securities. However, any updates the company’s management shares with brokerage analysts about its capex plans and timelines in a late evening meeting could influence the performance of the stock in the near term.