After seeing the weakness in earnings of India’s largest company by market capitalisation, Reliance Industries Ltd (RIL), the market is coming to the conclusion that elephants don’t dance. No doubt, the company will deliver net profit in the range of Rs 20,000 crore, but don’t expect more than this. The only lever of growth it has to increase profitability is in exploration and production, facing issues on both pricing and volume.
The traditional business will continue to grow at a mundane rate (read single digit).
While net sales have grown annually by 16 per cent to Rs 87,833 crore, sequentially the revenues have remained flat. RIL’s fourth quarter net profit has contracted 21 per cent to Rs 4,236 crore from Rs 5,376 crore in the fourth quarter of 2010-11.
Operating profit has steadily been falling through 2011-12, though net profit is in line with the Street’s expectations. From Rs 9,926 crore in the first quarter of FY12, operating profit has come down to Rs 6,563 crore in the fourth quarter. Analysts say this is reflective of structural issues in its key business segments. However, the Street has been taken aback by the gross refining margin (GMR) of $7.6/barrel for the quarter and $8.6/bbl for the full year.
Analysts were expecting GRM at $6.6/bbl. However, the net profit decline is in line with estimates and is not reflecting the higher GRM.
With weakness in the petrochemical business, coupled with falling profits from oil and gas, analysts believe the de-rating of RIL shares is not over. Sequentially, revenues have remained flat and operating profit has steadily been coming down over the past four quarters.
Dhananjay Sinha, strategist at Emkay Global, says: “There’s downside risk to the current market price of Rs 731. Given that FY12’s earnings per share is Rs 66 and we factor in Rs 74 EPS for FY13 and attribute a multiple of 10x, then the entire year’s growth is factored into the current price. The stock has seen buyback, yet has come under pressure.”
Rather than focus on the quarterly numbers, analysts say three triggers could revive the shares. The first is a resolution in oil and gas production from the Krishna-Godavari basin. If the company manages to increase output before 2013-14, it will be a big positive for the shares.
The second is any change in gas pricing, which will help improve profitability. Both these, analysts believe, are not in RIL’s control. Finally, the company needs to convey to investors what is happening to its massive investments in the retail and telecom businesses. Till there is clarity on these issues, the stock will continue to languish at current levels.