Reliance Industries Ltd. - Segmentwise Contributions Update.

Everybody knows that Reliance Industries Ltd. (RIL) posted it's best ever quarterly Net Profit figure for the Quarter ending Sept.'15. RIL's performance was boosted by it's two core business segments of Refining & Petrochemicals. All other segments had a subdued performance.

Here I will be sharing my analysis of Trailing-Twelve-Months numbers of RIL's segmentwise EBIT & Capital Employed numbers over the last 2 years and then present my expectations of how things could move over the next 2 years. First have a look at the Charts below:

In Sept'13, Refining & Petrochemicals together contributed about 88% of the company's Total EBIT of Rs.24,290 crores. Over the next 12 months, by Sept'14, RIL's Total EBIT grew by 14+% to Rs.27,765 crores. Oil&Gas, Retail and Media&Broadband segments posted faster growth rates, though on smaller bases, which pulled down the contribution from Refining & Petrochemicals segments to 84% of RIL's Total EBIT.

Over the last 12 months, i.e. for the period ending Sept'15, RIL's Total EBIT has posted a Y-o-Y growth of another 11+% to hit a figure of Rs.30,910 crores. Almost all this growth has come from the Refining business alone, which grew it's EBIT by a staggering 27% Y-o-Y. This alongwith the 5% growth in EBIT from Petrochemicals segment, pushed the contribution from these 2 core segments to 90% of RIL's Total EBIT. 50% drop in EBIT from Oil&Gas segment too aided this.

Now let's come to the other interesting part, i.e. Capital Employed in different segments. Between Sept'13 and Sept'15, RIL's Total Capital Employed number has increased by nearly Rs.1,00,000 crores. The Refining & Petrochemicals segments, which contribute around 90% of the company's EBIT, contributed just under 40% to this incremental Capital Employed number (36% from Refining & 3.5% from Petrochemicals). Part of the increase in Capital in the Refining segment could be because of the company's pile up of Crude Inventory, while the prices are low. 15% of the incremental Capital has gone towards Oil&Gas segment, most of it towards the company's Shale Gas subsidiaries in the US. Retail has consumed a negligible 1% of the incremental Capital. The remaining 44% of the incremental Capital has gone towards the Media&Broadband segment. Most of it towards the rollout of RelJio's 4G network.

If you look at the Chart alongside, more than 50% of RIL's Capital is now invested in businesses other than Refining & Petrochemicals, primarily in Oil&Gas and Media&Broadband. But the Revenue & Profit contribution from these segments is negligible currently. The contribution from Oil&Gas segment has been severely affected due to sudden & sharp fall in Global Crude Oil & Gas prices. This segment's growth is now linked to recovery in Oil & Gas prices.

The more interesting story will be the start of commercial 4G & Broadband services, slated to happen from the end of this year. The company seems to have done huge amount of ground work for a massive rollout, which has not been seen in India ever. January to March'16 will be the introductory launch phase for the company. There will be massive promotions across various media to increase the visibility of the Jio brand and all it's services across the country. Revenues for the company will start pouring in during this period, but it will be very small compared to the Expenses the company will entail towards this business & it's promotional activities. Hence we can expect the company to report a substantial EBIT Loss for this business during the quarter ending March'16. I am expecting the EBIT Loss to be anywhere in the region of Rs.3000 to 5500 crores. From April'16 onwards, the company's revenues are expected to grow at a very fast pace, which we will call the Ramp-up phase for the company. The revenues will keep increasing month after month, but the Expenses will grow at a much slower pace as most of the Operating Expenses will be steady right from Day-1. Hence the company's EBIT Losses will keep reducing with every passing month. I am expecting RIL's 4G & Broadband business to break-even at an EBIT level in about 6-8 quarters of the launch of services, i.e. by about June-December'17. These expectations might seem a bit on the optimistic side, but I think the company is going to be extremely aggressive in expanding this business and hence it could be an achievable target.

While the ramp up of RIL's 4G business will be happening, it's major CAPEX on the Petrochemicals side will also come on stream next year, which is expected to boost the company's Profits substantially. That means on one side the 4G business will report large losses in the initial few quarters, but at the same time the company's profits from the core business are expected to increase. The combined effect will mean that the Net Profit's may not get completely wiped out for anything more than 1 or 2 quarters. Beyond those 1 or 2 quarters, i.e. post June'16, it could be a double booster for RIL's profit numbers. On one side the 4G Losses will keep reducing with every passing quarter and profits from Petrochemicals segment will keep increasing till March'17 as the major CAPEX comes fully on-stream. FY'2017-18 will be the year to watch out for in terms of Reliance Industries Ltd's Financial performance. It could take RIL into a completely new trajectory.

Let's wait & watch if my expectations do turn out to be true!!

Happy Investing!!

SKS Microfinance - opportunity to invest at attractive valuation!!

I had written my first report on SKS Microfinance Ltd about 7 months back. Here is the link to that report: http://stockslogic.blogspot.in/2015/03/sks-microfinance-limited-successful.html

The company has continued it's smart recovery in business performance. SKS Microfinance Ltd's T-T-M Total Income has now increased to Rs.917 crores by June'15, which is 55% higher Y-o-Y. The company's T-T-M Net Profit has reached Rs.199.50 crores, which is 74% higher Y-o-Y, despite the fact that the company has paid an Income Tax of Rs.24 crores during the last 2 quarters after it's Tax adjustment eligibility against past losses seems to be getting over. The company's PBT figure was higher by over 95% Y-o-Y. Thanks to the Tax being paid from the recent 2 quarters, the Y-o-Y growth for Net Profit might seem lower for the next 2-3 quarters, than the numbers reported earlier. After that things will normalise. Have a look at the charts below:

With every passing quarter, SKS Microfinance is spreading it's reach at a steady pace. Focus is clearly on expanding it's business outside of Andhra Pradesh. In order to maintain tight check on quality of it's loan portfolio, the company is strictly disbursing loans only for Income-generating activities. Odisha & Karnataka continue to be the Top-2 states contributing to SKS's business, with Maharashtra, Bihar & West Bengal next in line. The company has a presence in total of 16 states with no state, other than Odisha or Karnataka, contributing to more than 15% to it's Loan portfolio. SKS Microfinance has seen a 25% Y-o-Y increase in it's Average Loan Size in Q1-FY'16 to over Rs.13,300/-. This is extremely positive from the margin point of view. With increasing business scale, the Cost-to-Income ratio is showing a marked improvement with every passing quarter. The Average Quarterly Disbursement, which was around Rs.1200 crores a year ago, has jumped to about Rs.2400 crores over the last 2 quarters.

Coming to stock performance, it had hit a multi-year high of around Rs.580/- in the last week of July'15. Since then the stock of SKS Microfinance Ltd has seen it's first major correction. The stock has corrected to levels of about Rs.380 by the last week of September'15.

 This correction has given an opportunity to long term investors who were looking to invest in SKS Microfinance at decent valuations. At the current price of around Rs.425/-, SKS Microfinance Ltd trades at a P/E ratio of about 26-27 times it's T-T-M EPS. Considering the company's current growth momentum and the potential of future growth continuity, these valuations aren't expensive. Infact it can be termed as attractive. The company's Total Income could very well double from current level of little over Rs.900 crores to around Rs.1800 crores in the next 4 to 6 quarters. The Net Profit may not grow at the same pace as Total Income, but still will post very good growth to ensure that current valuations to look cheap in the long term.

Happy Investing !!!