Date:30/04/2004 URL: http://www.thehindubusinessline.com/2004/04/30/stories/2004043001300200.htm

Back Reliance: Both petrochemicals, oil refining drive growth

Raghuvir Srinivasan

FOR the first time since the merger of Reliance Petroleum with itself, Reliance Industries has struck a purple patch with both its divisions — petrochemicals and oil refining — encountering favourable trends at the same time. The result clearly shows in the strong report card for the fourth quarter as indeed for fiscal 2003-04.

A growth of 9.68 per cent in turnover (net of inter-divisional transfers), a whopping 56.57 per cent in pre-tax profit and 28.88 per cent at the post-tax level in the fourth quarter clearly reflect the roaring time that the company had in petrochemicals and oil refining. A tight leash on interest and staff cost has also helped in boosting margins.

Happy days are here again.

The largest single factor in the exceptional earnings performance is the return of good times in the petrochemicals business.

Polymer and fibre/intermediate prices have been on the upswing in the last four months globally. Reliance, with its dominating presence in the business, is an obvious beneficiary from this up-cycle in commodity prices.

During the fourth quarter, revenue from the petrochemicals business fell 4.1 per cent over the same period last year, yet, gross profit (before interest and tax) more than doubled from Rs 382 crore to Rs 896 crore.

The widening profit margins are firmly based on higher product prices. Indeed, the share of the petrochemicals business in gross profit zoomed to 41 per cent in the fourth quarter from 28 per cent in the same period last year.

The company's strategy of optimising production of speciality grades of polymers that command a premium over commodity grades has obviously been another major factor in increasing margins.

With oil prices continuing to be above $30-per-barrel levels, Reliance's refining margins have continued to remain strong. Gross profits from the refining business surged by 42.35 per cent in the fourth quarter even as turnover rose by 32.06 per cent.

Going forward, the petrochemicals price cycle is expected to gather more strength taking product prices to higher levels. Of course, China's move to prevent over-heating of its economy is a point of concern but it may not really jam the brakes on the uptrend; at worst it may slow down the pace.

Reliance is also getting back into the investment cycle in a big way with a projection of Rs 15,000 crore to be invested in the KG basin, Rs 7,000 crore in retail marketing and another Rs 6,000 crore to increase capacities in petrochemicals in the next five years.

In the near term, the successful rollout of retail outlets is an important milestone to watch out for.

The company needs to do this quickly especially because the PSU marketing companies have cut down on their offtake of products from Reliance's refinery.