The numbers for the April-June first quarter looked solid for Mukesh Ambani-led Reliance Industries Ltd (RIL) despite a big fall in gas output and a weak performance in its traditional stronghold: petrochemicals. And the saviour was “other income” — the head under which sundry earnings are grouped.
Though sales fell by 4.9% in the first quarter over the year-ago period, net profit rose 19%
A deeper look at the numbers shows non-core operations boosted profits for RIL — and accounted for as much as one-third of the total profit before interest and tax.
An enviable cash pile of over R93,000 crore that’s been growing with every passing quarter helped the company earn interest, dividends and treasury gains from bond sales, adding to the comfort level as RIL plans a major $26 billion (R1,54,000 crore) capital expenditure plan to foray into emerging areas such as retail and 4G telecom.
“High other income covers up for middling operating performance,” said a report by Kotak Institutional Equities.
Contribution of other income towards profit was nearly 34% in June 2013 at R2,535 crore. In other words, the “other income” contributed as much as 34% to the profits while the company's core businesses — oil refining, petrochemicals, oil and gas exploration and production — contributed 66%.
“We expect other income contribution to remain elevated as cash balances are likely to remain high despite the planned capex spend,” said Deutsche Bank AG in its report.
“RIL’s weak petchem performance was offset by higher other income from treasury gains on long duration debt instruments and lower tax rate,” said brokerage house, CLSA.
Analysts see improved performance on the back of its four-year investment plan besides a revival of flagging gas output at the KG-D6 fields. The government's recent approval to double natural gas prices to $8.4 per unit from next year is expected to give a big push to performance.
All these parameters are expected to tell on stock performance in the short to medium term. RIL's stock is currently trading at a six-month high of R927 a share.
"We expect RIL to hold up relatively better in case of any correction in the Indian market on macroeconomic concerns," said the report by Kotak.