RIL Q1: Old (business) is gold, New a disaster?
By S. P. Tulsian
Reliance Industries has posted its Q1 results, ending 30th June, wherein, its two main segments viz., Petchem and Refinery, have shown excellent performance, but still PAT was seen below consensus estimates at Rs. 6,223 crore - thanks to the disastrous performance of Oil & Gas sector and flat performance of Organised Retail segment.
Petchem EBIT margins rose by 200 bps QoQ, to 11.21% from 9.21% in Q4 of FY15. Due to fall in the crude prices and robust polymer and polyester demand seen in this quarter, this division was expected to do well, but seen having performed better than expectations. Thanks to capacity additions in Petchem segment, with company having commissioned 650 KTA PET Resin plant and 1,150 KTA PTA plant, both at Dahej, having started production in April 2015, giving full benefits of this new capacity, for major part in Q1, giving better operating leverage.
Refining segment also posted robust performance, with GRM of $ 10.40/bbl, which is the highest by the company in last six years. RIL recorded an increase of $ 0.30/bbl, QoQ. This is despite Singapore complex margin having fallen to $ 8/bbl in Q1 against $ 8.5/bbl in Q4 of FY15. Due to higher crude refining of 16.6 million MT also in Q1, against 16.2 million MT in Q4 of FY15, EBIT rose to Rs. 5,252 crores in Q1 against Rs. 4,902 crores in Q4. Inspite of these positives, EBIT margin fell to 7.64% in Q1 for this segment, against 8.68% in Q4, which may not be seen a positive indicator, due to relative fall seen in the margins.
On the negative side, oil & gas segment is seen disaster. At one time, this was seen a golden goose for the company and more especially when the company divested 30% of its stake, to BP, for $ 7.20 billion in 23 blocks, in February, 2011. This segment has seen its income falling to Rs. 2,057 crores in Q1, against Rs. 2,513 crores in Q4. The worst part is EBIT seen falling to 1.6% from 19.5% on QoQ basis. Thanks to US Shale Gas business, which had negative (loss) for the quarter, at Rs. 49 crores, against profit of Rs. 336 crore QoQ. Even domestic operations saw EBIT falling to Rs. 83 crore against Rs. 164 crore.
Coming on the Organised Retail, which was infact highlighted by the Chairman, continuously in its last 4 AGM speeches, has also disappointed in the quarter gone by. Income fell to Rs. 4,698 crore in Q1, against Rs. 4,788 crore in Q4. Thanks to stiff competition seen from E-Commerce. Even EBIT of Rs. 111 crore in Q1 is seen stagnant, against Rs. 104 crore in Q4. Considering a capital employed of Rs. 6,280 crores in this segment, annualised pre-interest and pre-tax return of 7% extremely pathetic, considering that company is struggling to ramp up its performance on all fronts, in the last 4 years.
Does it mean that businesses which were started by the company in last one decade, like up-stream- oil & gas exploration, organised retail and oil marketing outlets are now seen a burden or seen a virtual write off?
Digital Services Division is now seen a growth driver for the company, in the coming years, practically by all – the company, analysts, marketmen and experts. But will history of past decade repeat itself, or will this project take off smartly? As at 30th June, 2015, company has capital employed of Rs. 72,004 crore in “other projects” and Rs. 1,17,781 crores in”unallocated projects”, which largely comprises of telecom business.
During Q1, other segment saw an EBIT of Rs. 234 crore, showing a big decline from Rs. 322 crore, seen in Q4. Does it mean that capital employed of Rs. 72,000 crores is yielding these results?
Of the unallocated capital employed of Rs. 1,17,781 crores as at 30.06.2015, largely comprises of telecom business, this division, once going operational will have an annual interest charge of about Rs. 8,000 crore and depreciation of approx Rs. 10,000 crore. If we expect an EBITDA margin of 40% from this division in first year, topline of Rs.45,000 crore will yield no EBITDA from this division, in the first year. Seeing stiff competition and margin pressure, with huge capex seen in the telecom sector, will this division be able to stand out and prove to be an independent profit centre? Looks unlikely for the first two full years, post launch of its telecom business, which is likely in the last week of December, 2015.
Rising interest cost of Rs. 902 crore (Rs. 677 crore QoQ) and falling interest income of Rs. 781 crore (Rs. 1,085 crore QoQ) has seen PBT falling to Rs. 8,152 crore in Q1, against Rs. 8,509 crore in Q4 of FY15, which is disappointing.
Income tax liability (excluding deferred tax, which is a book entry and non-cash item) is also rising to Rs. 1,825 crore against Rs. 1,732 crore seen in Q4 of FY15. This has seen income tax liability rising by 215 bps from 20.23% in FY15, to 22.38% in Q1 of FY16. Hence, 1st instalment of advance tax, which had cheered the market, may now be seen as negative or illusionary, as either company will have to shell out higher tax liability or will see lower payment of advance tax in next 3 instalments.
Overall, old projects are seen rewarding, while big concerns are seen on the new projects, on which market and company was and is seen quite positive. Keep fingers crossed.