RIL has reported disappointing results, with its net profit tanking 21%, to Rs4,473 crore on account of increased  expenses higher exchange rates

Reliance Industries (RIL), an enterprise run by Mukesh Ambani, has reported poor results as its net profit sank by about 21% year-on-year (y-o-y), to Rs4,473 crore, for the quarter ended June 2012. Its net profit margins too shrank, from 6.99% to 4.87%, more 200 basis percentage points, for the same period. This was due to higher material consumption, which increased by 23.1% from Rs64,443 crore to Rs79,335 crore mainly on account of higher exchange rate. Its net sales increased 13.4% from Rs81,018 crore in June 2011 quarter to Rs91,875 crore in the June 2012 quarter. Higher prices accounted for 4.1% growth in revenue while higher volumes accounted for the balance 4% growth.
Its operating profit for the quarter ended June 2012 declined 32% y-o-y to Rs6,747 crore, from Rs9,926 crore for the corresponding period last year. This is actually worse than its preceding three-quarter y-o-y decline in operating profits (30%). Reliance Industries’ revenues come from three segments namely: Petrochemicals, refining and oil & gas. All the three segments reported decline in operating profit on a y-o-y basis.
However, sequentially, its operating profit increased, albeit marginally and the first time in three quarters it reported increased operating profit. This underscores the difficulty in containing the cost structure of the business when the going gets bad. Employee costs for the quarter were Rs847 crore which is 41.9 % higher over the trailing quarter on account of one-time performance linked payments for the previous year’s performance. Its sales have been slow to respond, growing at a rate of 13%, which is almost half of its three-quarter y-o-y growth rate of 24%. The disappointment over the last few quarters caused its valuations to drop. Its market capitalisation to operating profits is now in single digit territory, at 8.64 times its operating profits while its return on equity is 11% only.

Addressing the positives rather than the shortcomings, Mukesh Ambani said in a press release, “Reliance Industries has improved its earnings profile as profits from operations were higher on a sequential basis on the back of volume growth in the refining business. We have commenced our next phase of capital investments in the refining and petrochemical segments to enhance earnings and value of our core energy businesses.”
Earlier, the company was served a notice by the Government of India, relating to a production sharing contract in one of the blocks (KG-DWN-98/3) in the Krishna-Godavari basin with regard to cost recovery. The company has initiated arbitration proceedings on the same matter.  

On a related note, its Canadian joint venture partner, Niko Resources, had earlier had reported that the reserves in the Krishna-Godavari Basin actually holds 80% less reserves than original estimated. In its press release it said, Reliance Industries is planning to submit Revised Field Development Plan (RFDP) for D1-D3 which is aimed at maximizing gas recovery from the existing fields. It also plans to further pursue approval of RFDP of D 26 (MA) submitted in the earlier quarter. Further, to expedite the development projects of other discoveries, RIL is preparing development plan(s) based on an integrated concept which is planned for submission in third quarter of the current fiscal.

RIL’s portfolio currently consists of 13 exploration blocks excluding KG D6, CBM, Panna-Mukta and Tapti. Both the Panna-Mukta and Tapti have reported decrease in production and reserves respectively.

Reliance has also started to get rid off some assets, for cash. Reliance Exploration and Production DMCC, a wholly-owned subsidiary of Reliance has completed the transaction for divestment of its 80% working interest and operatorship in the production sharing contracts (PSCs) for Rovi and Sarta Blocks in the Kurdistan Region to the subsidiaries of Chevron Corporation.

Outstanding debt as on 30th June 2012 was Rs73,213 crore compared to Rs68,259 crore as on 31st March 2012. The increase in debt in rupee terms is mainly on account of change in exchange rates.

In its press release, Reliance has mentioned about the newly planned Broadband Wireless Access that is supposed to offer 4G services. But no timeline has been mentioned.