Reliance Q3 results review; it’s a number game? - Be and Make

Summary of numbers;
*Its net sales were down 8.8% at Rs 31,563 crore versus Rs 34,590 crore.
*The company's Q3 net profit was down 9.8% at Rs 3,501 crore versus Rs 3,882 crore.
*Refining margins GRM USD 10 per barrel vs 13.4 per barrel, QoQ and 15.4 per barrel YoY.
*The company posted other income of Rs663 crores against Rs241 crores in the third quarter of last year.

A net profit of Rs3501crore for the December quarter for Reliance Industries Ltd (RIL) was almost in line with the experts if other income is excluded. Still, some analysts are surprised how the firm has managed to maintain its net profit levels of Rs3,501crore, at a time when refining margins have fallen sharply.

Positives:
1. RIL did much better than expected, since swinging crude prices had hit gross refining margins (GRMs) of oil companies worldwide. Analysts had expected a profit growth of 2% or less, or even a degrowth.
2. Average Asian refining margins represented by the Singapore crack spreads have dropped to US$5-7 a barrel in the December quarter. In Reliance’s case, however, gross refining margins have fallen but when compared to standalone refineries RIL’s complex refinery did much better than expected. RIL maintained its GRMs at $10 per barrel, better than most estimates.


Negatives:
1. The profit growth was sluggish considering the 20-30% plus growth RIL recorded in many preceding years.

2. EBIT for the refining business was at Rs 1,881 crore, a decrease of 28%
While EBIT margin decreased to 8.7% as compared to 10.0% in the corresponding period of the previous year.

3. EBIT for the petrochemicals business was at Rs 1,657 crore, a decrease of 7% while EBIT margin decreased to 13.1% as compared to 14.0% in the corresponding period of the previous year.

4. “Effects of Changes in Foreign Exchange Rates” notified in the Companies (Accounting Standards) Rules 2006. Had the treatment as per the AS 11 been followed, the net profit after tax for the nine months period ended 31st December 2008 would have been lower by Rs. 1,177 crore. This was down by 9.3% previous years same nine month period.

5. If we consider the forex loss under ICAI rules then the NP for the nine month period will become 10556 crores only and “the EPS would be 67/- only” which was highly showed as 78.6/-.

6. Other income was at 663 crores Vs 241 crores was up by 275% which includes Interest income was at 546cr vs 141cr a increase of 387%.

7. The provision for the current tax was shown only 499 crores vs 1063 crores which were showed low against the average of 779 crores from last three quarters.

8. RIL’s operating margins fell to 12.8% from14.46% QoQ and 16.87% YoY.

9. The net profit is down by 9.8% only due to the ‘other income’ if other income is excluded then the net profit is down by 15.45%. This is very important parameter to judge the performance of industry.

10. The other income and the less provision for current tax showed the NP to 3501 otherwise the NP would be less by (546cr+280cr) 826crore only for this quarter. Then the NP will become (3501-826) 2675 crores which is the practical number. This turns the EPS to 17/- only for this quarter where RIL showed it as 23.5/.

11. Needless to say, there’s more pain to come. These are the pure number game by RIL to trap the investors. “Refining margins are expected to remain muted till the end of 2010-11 due to overcapacity concerns and slower demand growth.”

What’s cooking in balance sheet? Results are not as per the ICAI guidelines?

Two issues were wrongly placed in the balance sheet?

1. The results clearly tell the fact that RIL is not following the “Accounting Standard (AS 11) on “Effects of Changes in Foreign Exchange Rates” notified in the Companies (Accounting Standards) Rules 2006.” If they will follow this then the NP should be lowered by Rs1177/-crores. !

2. In the balance sheet the ‘Provision for current tax’ was shown only Rs.499 crore which is also a little bit confusing due to from last three quarter that the average figure is Rs779 crores?

The answer should be come from the auditors or regulators!

The results looks as they are purely made for the number game, ICAI and SEBI should look seriously in this issue (item no.1).

Short term out look (1-3 months):
Technically some short covering might happen immediately but once it reaches the higher levels again selling might come. As said in last quarters review RIL’s outlook turns to positive only after the recession fears disappear. If anybody want to pick the scrip right now should required holding it for 3 year period. Short term outlook is bleak.

Levels to watch out for:
The likely range for RIL would be 1010 – 1380/- in the upcoming months.

Conclusion:
The results are better than its peers but not beaten the expectations!
For short term RIL to be avoided, its up side is capped. Nothing cheers about this result as the numbers are not showed as per the ICAI guidelines.

Those who are belief in the success story of Reliance can add this scrip to their bags in SIP route for six months, investing every month in equal amounts.

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With thanks
Be and make

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