Despite huge profits, margins under pressure

India's largest private sector company, Reliance Industries Ltd, also became the first private sector organisation in the country to post a quarterly profit in excess of Rs. 600 crore. The company's profit after tax (PAT) rose to Rs. 612 crore in the quarter ended 30 June 2000, up from Rs. 510 crore in the corresponding quarter of the previous year. However, calculations on a US GAAP basis show the profit to be at Rs. 477 crore.

The 20 per cent increase in PAT came on the back of a steep, 72.4 per cent, rise in sales, which rose from Rs. 3,837 crore earlier to Rs. 6,615 crore for the quarter (thanks largely to the newly commissioned facilities at Jamnagar in Gujarat), a 45 per cent rise in sales volume and a 23 per cent increase in prices.

On an equity capital of Rs. 1,054 crore the company has reported earnings per share of Rs. 5.80 for the quarter against Rs. 5.50 earlier on an equity of Rs. 934 crore.

Despite this rise, it was clearly evident that margins were under pressure.

The main reason for lower margins was a steep increase in expenditure, especially on raw material, which rose 115 per cent to Rs. 4,371 crore from Rs. 2,036 crore earlier, due to high feedstock prices. Interest cost rose 62.84 per cent to Rs. 298 crore from Rs. 183 crore, and depreciation 57.01 per cent to Rs. 325 crore from Rs. 207 crore earlier.

Net profit margin (net profit to sales) was 9.25 per cent against 13.29 per cent in the previous period. According to Mr. Anil Ambani, managing director, Reliance is predominantly a petrochemical company, since 95 per cent of its revenues came from this sector. According to him, the company’s 22 per cent return on net worth (18.8 for first quarter, previous year) is the highest in this part of the world, giving it the ability to clear all its debts in less than two years. based on current prices and cash flow levels.

Mr Ambani also stated that the company's total exports would cross the Rs. 4,500-mark this fiscal, making it a net earner of foreign exchange.

With an eye on the stock market, Mr. Ambani informed the press that Reliance's capital work in progress, which stood at Rs. 60 crore as of the end of the first quarter, was the lowest in the last ten years. This, he said, was clearly reflected in the capex- to-cash-profit ratio, which had fallen to just about 25 per cent (as of June 2000) from a huge 240 per cent in 1995. He further confirmed that the major capital expenditure program of the company was complete and now, the total capex was unlikely to exceed 3 per cent to 4 per cent of total assets in the current year. According to, the return on equity will show a gradual improvement as the year passes.

He said the main drivers of company’s share price in the next one year could come from acquisitions, doubling of polyester capacity, price growths and improved margins through selling of specialty products.

Mr. Ambani also answered queries on other related issues. to read about the same.