Reliance Industries First-Half Results

Reliance Industries has done it again. Its performance has been exactly the opposite of what analysts from all the research houses had expected.

In tune with the depressed prices for petroproducts, analysts had forecast a fall in margins as well as net profit at Reliance. Instead, at the bottom of the petrochemical cycle, the company has been able to increase profits. Reliance seems to have found a way to beat the commodity cycle.

For the six months period ended September 1996, it has recorded a net profit of Rs 651 crore, up by Rs 18 crore from the corresponding period of 1995. Reliance has not resorted to crude tinkering with other income in order to show a higher profit. Other income has, in fact, dropped to Rs 114 crore from Rs 120 crore.

 

Operating profits have increased from Rs 772 crore to Rs 780 crore. Operating profit margins have fallen, but insignificantly, from 19.5 per cent to 19.3 per cent. In fact, operating margins during the second half of 1995-96 were 18.4 per cent, which means there has been a substantial rise in the same.

The company has claimed that increased volumes have enabled it to offset the effect of the lower prices.

During the first half of the year, new capacities have been commissioned in PSF, besides the 60,000 tonnes PFY commissioned during the second half of last year. That would mean volumes during the first half of this year would be substantially higher, compared with the volumes in the corresponding part of last year. The polypropylene plant, however, was commissioned only in September.

Despite these higher volumes, net sales have increased by a meagre 1.9 per cent, because product prices were much lower.

This does not explain, however, the fact that margins have remained at more or less the same levels. Further, profit margins at the net level too have increased, mainly due to drop in interest charges, from Rs 107 crore to Rs 72 crore.

Analysts are baffled at the companys ability to weather the worst of the commodity cycle unscathed. In spite of increased borrowings to finance its capital expenditure, interest costs have actually fallen by a third.

Analysts said that there can be several explanations for the steady margins. First, Reliance Industries has increased the value added in its manufacturing.

With the commissioning of PFY/PSF capacities, it is now using PTA internally and selling PFY or PSF, adding to the value chain.

This means, while earlier the chain was from paraxylene to PTA, it is now from paraxylene to PFY/PSF. Such value addition results in higher margins.

Second, Reliances capital expenditure allows it scope for allocation of expenditure to capital account, rather than route it through the P&L account. Interest charges too appear to have been capitalised.

Third factor, about which the company is silent, is that inter-divisional sales figures have not been disclosed. In Reliance, such sales make up over 20 per cent of total turnover. Margins will change with every change in the amount of inter-divisional sales. Although inter-divisional sales would increase consequent upon the increase in PFY/PSF capacities, it all depends at what prices these sales have been effected. If inter-divisional sales were lower, margins would move upwards.

With the first half results so good, the petrochemical cycle bottoming out and new capacities coming on stream, the second half should be better.

Internationally, prices of PTA have increased from around $530 a couple of months ago to around $580 now. Bombay Dyeing recently hiked its DMT prices, and although Reliance has already increased prices at the fag end of the first half, it could raise prices again.

However, there is a debit side for the second half. New projects take some time to stabilise, and, in the interim, interest and depreciation costs, capitalised earlier, get reflected in the P&L account.

And about international petrochemical prices increasing-that is because some producers have cut back production. Once prices increase, it wont take much for production to increase once again.

Most important, Reliance Industries has made no provision for MAT in the first-half results. If such provision had been made, MAT would have been around Rs 83 crore, and net profits would have been substantially lower than last year. MAT will take its toll in the second half.

lMore reports on Page 11