There is a famous french proverb which says “The silence of the people is warning for the king”. The proverb is perfectly suitable for this situation where once the king of all stocks has been underperforming in last two years. The shareholders of this biggest grass root refinery company in the world are silently witnessing the results, quarter on quarter and year on year and at every negative step they are bashing the stock price of the company. The confusion and question are increasing on shareholder’s mind whether to completely exit from the stock at this level or its just a matter of small hiccup which would passed in a quarter or two.
The Company recently declared Q3 FY 12 result which was as medicore as its stock performance in last two years. Also before the results the Company announced a buy back program where company will buy back its shares from open market. Now the question arises, was it a planned decision to announce a buy back just to overcome the heat of bad result? Or the company is not having any way to utilise its cash. We tried to analyse the situation to help the shareholder to decide whether to exit this falling kingdom or invest in it to build much bigger empire.
The top line of the company has grown by 40% (Y-o-Y) in Q3 of the current fiscal year compared to previous year whereas the bottom line has hit by 13.6% in the same period. The EPS of the company has decrease by over 15% compared to Q3 FY11 but the major blow company faced was in Gross Refinery Margin (GRM) which stood at US$6.8 for Q3 FY12 v/s US$9 in Q3 FY11. The major reason behind this debacle was increase in raw material cost and lowering in the demand citing global slowdown. Another reason which contributed a lot was difference between Arab high and low crude was nearly eroded and the premium was pretty less.
If looked closely the raw material cost was increased by 50.6% in 9M FY12 compared to previous year thus, putting excessive pressure on EBITDA margin. One thing to closely monitor was the other income component which was increased by 86% (y-o-y)in Q3 FY12. The contribution of the other income (largely interest on idle cash) to PBT grew to 30 per cent from only 15 per cent in September 2011 quarter and 10 per cent in December 2010 quarter. This means Reliance Industries is making more money from money than from the capital deployed in businesses. This itself is a warning sign for the shareholder where the profit from the company’s core business is gradually declining.
Two of its important business Refining & petrochemical underperformed heavily due to sluggish demand in the international market. The GRM (Gross Refinery Margin) which stood at $6.8 for the quarter was far below than Singapore benchmark which stood at US$ 7.3 to US$ 7.4.
The Company has also announced a share buyback programme just before declaring Q3 results. The Company will buy back shares up to 12 Cr equity shares with a maximum price of Rs 870. it has also capped the buyback investment up to Rs 10,440 Cr. The announcement timing is really questionable as let-down results were followed after the announcement was made.
Once the king of stock market and prince of index is going through a turbulent situation quite lately. In last one year, the market has shown a fall of 12% whereas the RIL has a shown a downturn of 20%. The Shareholders are now getting bit dizzy about the underperformance of the scrip in the bourse in last two years.
Niraj Rampuria, A Market Learner [niraj@hbjcapital.com]
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