Recommendation: Buy
CMP = Rs 2,577
Price target: Rs 3,025
Key points:
- Reliance Industries Ltd (RIL) has reported a growth of 35.8% yoy in its stand-alone revenues to Rs 37,286 crore for Q4FY2008 which is on the higher side of market expectations. In terms of segments:
- The refining division grew by 36.4% yoy to Rs 28,686 crore.
- The petrochemical division grew by 12.3% yoy to Rs 14,119 crore, driven largely by the growth in volumes.
- The exploration and production (E&P) division grew by 51.1% to Rs 828 crore.
- The operating profit margin (OPM) during the quarter declined by 270 basis points yoy and by 80 basis points qoq to 16.1% in Q4FY2008. In terms of segments:
- The margin for the petrochemical division declined by 60 basis points to 10.4% due to higher crude oil prices.
- The gross refining margin (GRM) for the company increased marginally on a sequential basis from US$15.4 per barrel to US$15.5 per barrel in the quarter ended March 2008. The GRM was higher on account of sustained structural tightness in the global distillate market and sustained light-heavy differential.
- The margin for the E&P division declined by 110 basis points to 54%.
- The company's net profit increased by 24% yoy to Rs 3,912 crore during Q4FY2008 over the same quarter last year. Its interest expenses were lower during the quarter due to the rupee's appreciation vis-à-vis the US Dollar whereas the depreciation charge was marginally higher. For FY2008, the consolidated net sales grew by 19.5% to Rs 137,147 crore. The consolidated net profit (after excluding exceptional items) grew by 26.9% to Rs 15,326 crore. The exceptional item of Rs 4,733 crore represents gains primarily arising out of transactions concerning Reliance Petroleum Ltd (RPL) shares.
- During the year, RIL made nine new discoveries in its offshore E&P blocks. It also achieved 90% overall progress in the implementation of RPL's complex refinery. Reliance Retail today operates over 590 stores in 57 cities, spanning over 3.5 million square feet of trading space across 13 states.
- With nine oil and gas discoveries during the year and a portfolio of exploration blocks, the company holds a great promise in the exploration business. The refinery business would exhibit good performance on the back of superior margins and volume growth in future as RPL's new refinery becomes operational during FY2009. This along with the growing contribution from the retail business provides a well diversified growth opportunity.
- Currently the stock is trading at 14.5x FY2010E consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.1x.
- I maintain strong Buy recommendation on the stock with a price target of Rs 3,025.
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