RIL results: Strong petrochem biz negates impact of lower refining margins

Shares of Reliance Industries rose as much as 3.2 percent on Tuesday before losing altitude after its July-September operating profits beat some analysts’ estimates. The improvement was due to better-than-expected margins in the petrochemical business.

Reliance, which operates the world’s biggest oil refining complex in western India, met analysts’ estimates with a 1.5 percent rise in net profit to Rs 5,490 crore againstRs 5,409 crore year-on-year (YoY). This was despite a 19 percent drop in gross refining margins.

The company’s gross refining margins (GRM) - earnings from processing every barrel of crude oil - stood at $7.7 a barrel, compared with $9.5 a barrel in the same quarter a year ago, but revenues for its refining and marketing segment rose 16.2 percent to Rs 97,456 crore. Moreover,RIL’s margins were more resilient than Singapore benchmarks due to a widening in light-heavy crude differentials.

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The company’spetchems contribution was up 33 percent QoQ with improving polymer margins, volumes and a weak currency.Profits from this division increased sharply to Rs 2,504 crore as compared to Rs 1,888 crore in the previous year and Rs 1,704 crore for the same quarter in the previous year.In other words, a robust performance in the petrochemicals division negated the impact of lower refining margins.

RIL also said that the profitability of the ‘polyester’ chain in the domestic market is much better than what was suggested by ‘international margins’ due to domestic supplies and rupee depreciation.

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RIL alsoposted higher operating profit of Rs 5,616 crore despite a 3 percent higher cost of crude oil on a year-on-year basis..

For the year though the oil and gas major reported a 1.5 percent increase in net profit and became the first company in the country to achieve sales of more than Rs 1,00,000 crore in a quarter.

[caption id=“attachment_1140559” align=“alignleft” width=“380”]  RIL also posted higher operating profit of Rs 5,616 crore despite a 3 percent higher cost of crude oil on a year-on-year basis..
Reuters[/caption]

Following the earnings, brokerage JP Morgan upgraded the stock to ‘overweight’ with a target price of Rs 1,000 for March 2015. “We remain positive on RIL’s core business expansion strategy, and expect resultant organic earnings growth to drive stock performance,” said the global investment bank.

The investment bank added that company’s September-quarter earnings came in line with consensus estimates, but with better petrochemical and refining performance and lower other income.

According to Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities, RIL has clearly surpassed estimates due to the company’s petrochem margins.

“The petchem margins at 10.05 percent is a clear positive surprise which had influential positive impact on the overall results. Even though GRMs (Gross Refining Margins) are subdued, the petchem margins have significantly outperformed.”

He also said that the “Other Income” component has played a reduced role in the overall profitability.

For instance, in the quarter ended 30 June 2013, the contribution of “Other Income” to profit before tax is about 38 percent. However, in the September quarter the contribution of “Other Income” to profit before tax has reduced to 30 percent. “This is an encouraging sign as the core business has started to contribute more to profitability,” he added.

Antique Broking has reiterated a buy with a target price of Rs 944 from Rs 974 earlier but reduced its FY14/15 earnings estimate by 6 percent due to lower GRMs of $8.5/bbl. It also expects petrochem performance to remain range-bound in the near-term as signs of a sustainable recovery are still vague.

ICICI Securities has alsomaintained a buy rating on the stock with a target price of Rs 87. However it listed three key risks to its valuations:

• Valuations are highly sensitive to GRMs and petchem cracks. Global economic slowdown can impact RIL’s refining and petrochemical margins.

• Major changes in the estimation of hydrocarbon reserves in RIL’s E&P blocks can impact the valuation.

• Unfavourable outcome of litigation with government for D6 block expenses/approvals can impact valuations and multiples.

The future quarters profitability will depend largely on the improvement of Gross Refining Margins, deployment of cash and KG-D6 basin gas production volumes revival.

And althoughRIL did not provide any guidance on future volumes, it said that it has received approvalsto spend $1.2bn during FY14 on existing producing fields onseveral projects, including work-over operations, and drilling of the MA8 well, which should help it to augment production.

However, brokerage Kotak said that a potential resolution of prevailing issues regarding the KG D-6 block through arbitration may allay concerns on increase in gas price for extant fields and penalty on cost recovery.

“The government’s recent pragmatic approach to the domestic upstream sector suggests a favourable resolution, assuming that RIL is not found guilty of improper handling of reservoir or inefficient management of the work programme,” it said.

With inputs from Reuters

(Disclosure: The Reliance Group has funded the promoter of Network18, which publishes Firstpost)