Company Update: Reliance Industries

Reliance Industries (RIL) has closed five of its seven polyester and petrochemical units at Patalganga near Mumbai soon after offering exit option to employees.

The move, which comes in the backdrop of a global slowdown, aims to improve profit margin amidst falling demand for polyester products worldwide.According to reports the company has shut down plants for manufacturing polyester filament yarn (PFY), polyester staple fibre (PSF), paraxylene (PX), purified terephthalic acid (PTA) and linear alkyl benzene (LAB).

However, it is yet to close down the second units of PSF and PFY. For the last one month, production from these units has been partly paralysed and employees were sitting idle.

The company has plans to convert the Patalganga site into a warehousing facility for retail activities due to its proximity to Mumbai.

RIL had recently converted another IPCL facility in Navi Mumbai into Reliance Corporate Park, which is envisaged to be the controlling hub for the Mukesh Ambani group’s global operations.

It plans to upgrade and automate most of the old polyester units since the profit margin from operations have shrunk after the price rise of crude oil, the raw material for polyester.

RIL had shut down its polypropylene plant at the Jamnagar refinery complex for a month to improve product swing capability and increase propylene yield.
We maintain a BUY on the stock with a target price of Rs1,880.

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Subex Azure : Kotak Securities maintains REDUCE on Subex Azure

Subex Azure’s Q2FY09 results came in below expectations. While EBIDTA was marginally higher, lower other income component impacted net profit.

Mark-to-market (MTM) loss on foreign borrowings stood at Rs706 million for the quarter. Order booking higher q-o-q but we remain concerned about the macro headwinds.

Management maintains FY09 products revenue guidance of Rs 5 billion and $125 million (exchange rate assumption is surprising). Maintenance of rupee guidance despite the significant rupee depreciation indicates reduction in expected US dollar revenues, negative in our view.

The PAT guidance (including services business) at $12 million excludes impact of MTM losses. The unpredictability of Subex’s model prevents us from becoming bullish. The overall macro scenario in telecom and related verticals makes us cautious.

We have tweaked our lower-than-guidance FY09 EPS estimates with an expected EPS of Rs12.1. Our DCF-based price target works out to Rs65 (Rs127 earlier). The stock has corrected significantly post our previous Reduce recommendation. Continue to recommend REDUCE due to uncertainty over the US economy. Forex loss on FCCBs (notional, as of now) and potential equity dilution arising from FCCB conversion are the other variables.

We may review the recommendation in case of sustained improvement in performance in future quarters.

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