Stocks
Reliance Industries Q2 net profit hit by weak demand

Despite good revenues, RIL reported stagnant profits due to weak demand, solid product cracks, weak gasoline and widening differentials between Brent and Dubai grade oils

Despite healthy growth in revenues, Reliance Industries Ltd (RIL), the country’s largest company from the private sector, reported flat net profit during the September quarter. The poor quarterly result was mainly impacted by weak gasoline, solid product cracks, widening differentials between Brent-Dubai grade and lower domestic sales.
 

For the second quarter to end-September, RIL said its net profit increased 1.5% to Rs5,490 crore from Rs5,409 crore even as its total revenues rose 14.2% to Rs1.06 lakh crore from Rs93,266 crore, same period last year.
 

During the quarter, its Brent-Dubai differentials widened to $ 4.1/bbl in 2Q FY14 from $ 1.7/bbl in the trailing quarter.
 

Mukesh Ambani, chairman and managing director, RIL said: “RIL’s first half performance reflects the resilience of our business model in a period of volatility and uncertainty. Our diversified and integrated petrochemicals business captured margins across segments – delivering near-record profit levels even as the domestic economy slowed. Retail business continues to break new ground, growing 41% in H1FY14. Reliance’s ongoing counter-cyclical investments will strengthen our competitive position in each business segment.”

 


During Q2FY14, RIL Jamnagar refineries processed 17.7 MMT (highest ever quarterly throughput) of crude and achieved utilization rate of 114%. In comparison average utilisation rates for refineries globally during the same period were 86.7% in North America, 78.7% in Europe and 85.2% in Asia.
 

During the quarter, RIL’s revenue from refining and marketing segment increased by 16.2% to Rs97,456 crore from Rs83,878 crore, during the three months ended September 2014. Growth in revenue was accounted by 4.9% higher volume and 11.3% increase in prices.
 

The much touted KG-D6 field where Reliance Industries overestimated production, produced one million barrels of crude oil, 0.13 million barrels of condensate and 94.6BCF of natural gas in H1FY14, a reduction of 41%, 50% and 52% respectively on a y-o-y basis. According to the company, the poor performance was attributed to “geological complexity and natural decline in the fields”.
 

As on 30 September 2013, the company had an outstanding debt of Rs83,982 crore compared with Rs72,427 crore as on 31 March 2013.
 

At the same time, it had cash and cash equivalents of Rs90,540 crore ($ 14.5 billion). These were in bank deposits, mutual funds, CDs and Government securities / bonds.
 

Highlights of RIL performance:
 

# RIL announced a new gas condensate discovery off the east coast of India in the Cauvery basin. The discovery, situated 62kms from the coast in the Cauvery Basin and is the second gas discovery in the block. RIL is the operator with 70% equity and BP has a 30% share.
 

# In July 2013, RIL inked a Memorandum of Understanding with the Oil and Natural Gas Corporation (ONGC) to explore the possibility of sharing RIL’s infrastructural facility in the East Coast.
 

# RIL and its partners BP and NIKO announced a significant gas and condensate discovery in the KG-D6 block off the eastern coast of India. This discovery is expected to add to the hydrocarbon resources in the KG-D6 block. Appraisal will now commence to better define the scale and quality of the field.
 

Before the result announcement, RIL closed 0.8% up at Rs870.25 on the BSE, while the benchmark Sensex ended Monday marginally higher at 20,607.

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Sensex, Nifty in a bullish mode: Monday closing report

Nifty has to stay above 6,080 for the upmove to continue

On a lower volume of 53.85 crore shares on the National Stock Exchange (NSE) the Nifty continued to close in the positive for the fifth consecutive session on Monday. The market traded mostly in the green with minor dips in the red. The Sensex opened at 20,535 and immediately after hitting a low of 20,498 went upto the level of 20,646. The 30-share benchmark closed at 20,608 (up 79 points or 0.38%). The Nifty opened in negative at 6,093, went down to 6,083 and closed at 6,113 after hitting 6,124 (up 17 points or 0.27%).

 

Among the other indices on the NSE, the top five gainers were IT (2.16%); PSU Bank (0.78%); Service (0.75%); Midcap (0.62%) and Nifty Midcap 50 (0.60%). The top five losers were Metal (0.75%); FMCG (0.65%); Consumption (0.44%); MNC (0.43%) and Pharma (0.38%).

 

Of the 50 stocks on the Nifty, 23 ended in the green. The top five gainers were TCS (4.55%); Ambuja Cements (2.77%); Wipro (2.41%); ACC (2.27%) and Bank of Baroda (1.63%). While the top five losers were Hindalco (3.24%); Asian Paints (3.02%); GAIL (2.14%); Cipla (2.06%) and Tata Steel (1.96%).

 

Industrial production growth slowed to 0.6% in August 2013 from an upwardly revised 2.8% pace in July, hurt by weak investment and consumer demand, government data showed on Friday, 11 October 2013. The entire growth in industrial production in August 2013 was mainly driven by 7.2% surge in electricity generation. The mining output continued to witness decline in output, while the manufacturing sector output also recorded fall in August 2013. The manufacturing sector, which constitutes about 76% of industrial production, crawled up 0.1% from a year earlier. Capital goods production has contracted by 2% in August from a year earlier.

 

Wholesale price inflation (WPI) accelerated to a seven-month high in September 2013. WPI inflation accelerated to 6.46% in September 2013, from 6.1% in August 2013. Increase in inflation in September 2013 was mainly driven by surge in inflation for crude oil and non-food primary articles viz. fibres and oilseeds. Core inflation accelerated to 2.06% in September 2013 from 1.97% in August 2013. Inflation for July 13 was revised upwards to 5.85% from 5.79% reported earlier.

 

US indices closed in the positive on Friday on the hopes of talks between the White House and Congress will lead to a spending package needed to fund the government and put to rest concerns the country will hit its debt ceiling and risk default. But this turned out to be misplaced.

 

Asian markets which were open today mostly ended in the negative as American lawmakers struggled over an accord to raise the US debt limit and restore government operations. The only gainer was Shanghai Composite (up 0.43%) while the top loser was Taiwan Weighted (down 0.90%). Stock markets in Japan, Indonesia and Hong Kong were shut for holidays.

 

China's exports unexpectedly fell in September and inflation jumped on food prices, signaling constraints on the nation's recovery. Overseas shipments dropped 0.3% from a year earlier, customs data showed on 12 October, while imports rose a more-than-forecast 7.4%. Consumer prices rose 3.1% as food costs advanced the most since May 2012, statistics bureau figures showed in Beijing.

 

European indices were trading mostly in the negative and the US Futures were deeply in the red after talks between Republicans and Democrats broke down on the issue of debt ceiling.

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Meat and eggs consumption growing faster in India than milk, cereals

Almost 37% of agricultural output growth between 2005 and 2011 came from animal products. This is partly a reflection of changing food habits—per capita consumption of food grains is falling whereas that of edible oil, milk and meat is rising, says Credit Suisse

Milk, meat, and egg consumption in India is rising much faster than that of cereals.  Not surprisingly, 37% of agricultural output growth between 2005 and 2011 came from animal products. Within this category, output of eggs and meat has risen faster, and poultry the fastest. Animal products have also contributed to 33% of the incremental food inflation over the past five years; as consumption baskets are revised, these could be even higher, says Credit Suisse in a research note.

 

Of India's agricultural output, 31% comes from animal products: milk, meat, egg, fish and others such as silk and honey. As these are growing faster, their contribution to incremental growth has been higher—37% of the agricultural output growth between 2005 and 2011 came from animal products.

 

According to the report, this part of agricultural output is growing faster than all other agricultural categories except fruits and vegetables. This is partly a reflection of changing food habits—per capita consumption of food grains is falling whereas that of edible oil, milk and meat is rising, particularly in the recent past, says the report.

 

 

Credit Suisse says output of eggs and meat in particular has risen faster than that of other animal products like milk and honey, however, the growth in animal products is likely under reported in the country. It said, "Unlike cereals, the largest source of taxes for governments over centuries, livestock data collection seems patchy. For the most rigorous source—the livestock census, conducted every four-six years—the last updated data are from 2007(2012 survey data are not out yet). This is before what we call 'the Silent Transformation' started. Other sources of data are inconsistent, though all point to rising growth."

 
The report says while it is clear that demand for chicken meat has accelerated, the quantum of the change is uncertain; three different sources suggest different levels of demand growth. NSSO surveys suggest the demand for chicken meat saw 20% CAGR between 2005 and 2010. However, the Animal Husbandry department believes chicken meat output only saw 8% CAGR, and FAO believes the chicken population rose 12%.

 

Milk yields rising at 3% CAGR, but still low

According to Credit Suisse, growth in milk production in India has been quite steady at about 4% a year over the past few decades. About half of that has come from an increase in the numbers of cattle and half from an increase in yields.

 

Much of the yield increase also seems to be coming from an improvement in breeds, particularly cows. For buffaloes, which contribute to more than half of India's milk production, the yield improvement has been quite low. The current fat content of the milk from cows in India (about 4.5%) is quite low though some consider it healthier, which is possibly one of the reasons Indian milk is among the cheapest in the world. Buffalo milk fat content is higher (about 7%), so it commands a better price.

 


Despite having the largest heads of cattle globally, India's milk output is only the second largest after the US, with yields per cow right at the bottom, though they have been rising rapidly of late, Credit Suisse says.

 

Cost still pushing up prices: A sharp spike unlikely

According to the report, milk has been a significant contributor to food inflation over the past five years, even though the recent tempering of milk price appreciation has meant that its contribution to food inflation over the past year has been much lower.

 

"Looking at annual changes in milk prices, we conclude that the five-year surge was likely due to a one-off sharp increase in fodder and labour prices in FY10, the two key input costs for milk production.  This correlation doesn't apply strongly on an annual basis, but it should not either—after all, the capital investment in a cow/buffalo is a sunk cost and whether to increase supply or not cannot be taken on an annual basis. This adjustment happens over several years (from insemination of the animal to the lactation period). Over a five-year period, though, there is a meaningful visual correlation," Credit Suisse says.

 

Meat exports: Structural uplift

Meat production as per official statistics has been growing at the fastest pace among all agri sub-categories, and particularly so among animal products. This is despite what seems to be gross under-reporting of growth, given that some government surveys seem to suggest much faster growth in demand than what supply data suggest.

 

Exports of animal products are rising at a rapid clip, and we estimate more than 7% of total output is now exported. This is primarily meat (beef—India was the largest beef exporter in the world in CY12, and the FAO expects India's exports to rise another 20% in CY13), though marine and poultry and dairy exports too have risen, the report says.

 

Almost all of the increase in meat production in India has come from buffalo meat (Figure 28), 90% of which is exported.  The increase has come primarily from Uttar Pradesh (UP), Andhra Pradesh (AP) and Punjab. The numbers slaughtered in 2011 were 6.9 million, which should have risen to about 10.5 million animals by FY13. It is hard to see this number rising much higher, as a top-down analysis suggests  that  of the 105 million buffaloes in 2007, only 20 million were males, and less than 2 million were females beyond reproductive age, the report says.

 

Poultry production = job creation
 


The fastest growing form of meat production is poultry, which not surprisingly is where demand growth due to changing food habits is the strongest as well. As  the poultry population saw a CAGR of 10%+ per annum in 2006-11, it also created  about 0.75 million jobs per year during 2005-10. We expect it to continue to drive job growth at the pace of 0.8-1.0 million jobs per year going forward, Credit Suisse says.

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