Reliance Q4

Continues to impress on the margins front…

The Reliance fourth quarter results announced on Friday were much better than street expectations. This was partly due to the lower expectations that had built around the fourth quarter. A profit of Rs.7380 crore was slightly above street expectations. The two things that were really commendable about the results were the above average margins and the performance of its downstream refining and petchem business.

Margins were the big story…

 Reliance top-line is largely susceptible to oil prices, and with oil below $40/bbl, there was a sharp fall in revenues. The quarterly revenues fell by 9% to Rs.64,569 crore while for the full year the revenues were down 23% at Rs.296,000 crore. Combined with the rise in profits due to tremendous economies of scale, the net margins and the operating margins have scaled to impressive levels. Net margins came in at 11.3% and operating margins came in at above 17% which was largely due to maintaining impressive profits on lower revenues. Apart from the net and operating margins which are the best in industry, the Gross Refining Margins have also come in at an impressive $10.8/bbl. Although this number is below the impressive $11.5/bbl recorded in the previous quarter, this GRM is still way above the Singapore benchmark at $8/bbl. The downstream business has surely been the highlight of the Reliance Q4 results.

Non-oil has been impressive too…

It is not just the refining business, but even the non-oil business has done well in the quarter. The petrochemicals business had margins of 13%, making it one of the best petchem performances for RIL in recent times. The petchem business has benefited from the diversified portfolio of products that RIL has. Weak oil prices ensured that the naphtha cracking economics of RIL had improved substantially in this quarter. The company also benefited from favorable polymer prices. Additionally, Reliance Retail has shown a growth of 28% in the quarter and the proposed launch of Reliance Jio is expected to fructify soon. All these will add substantial visibility to the profitability of Reliance Industries in the next 5 years.

What about shareholder returns?

That is actually the billion dollar question! Reliance share prices have been virtually flat over the last 5 years and that is unlikely to change in a hurry. There are questions about how the company will utilize the massive cash reserves in its balance sheet. Shareholders would like to see some genuine shareholder benefit in the form of either a buyback or a higher dividend. RIL’s core business model is cyclical making it susceptible to low P/E. An attractive dividend yield or a buyback can enhance the interest level of investors in the Reliance stock! ©

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