Earnings Review: Will RIL remain an investor darling?

Will the better-than-expected earnings help Reliance Industries remain an investor darling? There are positive statements from the company and there is a buyback to support the share prices. But are they enough?

For the first quarter of financial year 2013, Reliance reported a 21 percent decline in net prfot at Rs 4473 crore on a year-on-year basis despite a 13.4 percent rise in sales as margins in its refining and petrochemicals slipped. Net sales for the April-June quarter stood at 1 Rs 91875 crore.

The energy major reported gross refining margins of $7.6 a barrel for the June quarter, compared with $10.3 a barrel a year earlier, but sequentially they are flat.

“We have commenced our next phase of capital investments in the refining and petrochemical segments to enhance earnings and value of our core energy businesses,” Chairman Mukesh Amabni has been quoted as saying in a report in The Economic Times.

This is by and large a customary statement that investors are unlikely to attach any credibility to. The press release has not detailed any concrete plans to ramp up the declining gas production, which is one of the aspects that affected the profitability.

“The KG-D6 field produced 0.9 million barrels of crude oil, and 104.40 BCF (billion cubic feet) of natural gas, which was lower by 36.7 percent and 33.1 percent, respectively, over the previous period,” the release said. It reiterated its stance that the reduction in production was due to reservoir complexity and natural decline.

“Significant efforts towards augmenting production from KG D6 have been undertaken during the quarter,” the release said. This again does not contain any concrete details of its plans.

The company is planning to submit revised field development plan (RFDP) for D1-D3. It also plans to further pursue approval of RFDP of D26 (MA) submitted in the earlier quarter.

An integrated development plan will be submitted to the government in October-December.

These statements do not offer any hope to the investors, who have been disappointed as the company failed to keep up with their expectations for the last few quarters.

On the contrary, they may be suggesting that the standoff between the company and the oil ministry is unlikely to end anytime soon.

The sequential increase in earnings is primarily because of the depreciation in the rupee.

“The rupee-dollar ratio has been helping refining and plus the way they have been sourcing their oil, a lot of it has been coming from Latin America and also from certain parts of West Africa plus the cargo parcels were organised which I think was in the market already that Reliance is doing better than any other company in this part of the world,” Narendra Taneja, bureau chief - South Asia, Upstream, told Moneycontrol.

The general feeling among analysts is the numbers are attractive at the first glance, but the fine print is not painting a rosy picture.

The decline in petrochemicals margin is a concern and the core refining business is unlikely to give any major positive surprises in the near future, given the prevailing macro economic situation. However, analysts hope a short fall in supplies to offset the decline in demand.

According to analyst SP Tulsian, the fall in petrochem business is a big negative for the company. He also expressed doubts whether the company will be able to sustain the good show of the refining operations, a Mint report said.

As a Reuters report said it is the cash utilisation and increase in gas utilisation that would boost the stock prices.

“The numbers are an improvement and investors may start looking at the company again, but it’s too early to change the outlook for the stock,” KK Mital, head of portfolio management services at Globe Capital Market, has been quoted as saying in the report.