 "Why investors are bullish on RIL despite subdued Q3 showing")
Reliance Industries’ Q3 earnings surprised analysts as the company reported a higher than expected net profit of Rs 5,511 crore. Median estimates of most of the analysts poll by various news agencies had seen the profit around Rs 5,300 crore, mainly due to muted petrochemicals margins and lower gas volumes from KG-D6.
However, a higher-than-expected other income helped the company post a higher net profit. Higher income from investments and lower finance costs aided the company to balance out a fall in operating income.
“Operating income declined on account of lower petrochemical margins. This was offset by higher other income and lower depreciation. Margins weakness led to decline in petrochemicals segment EBIT. This was partially offset by higheroperating profit from Oil & Gas segment,” the company said in a presentation detailing the earnings. Contribution from oil & gas business increased to 9 percent on quarter due to higher oil sales.
[caption id=“attachment_1303287” align=“alignleft” width=“380”]  Chairman and Managing Director of Reliance Industries Limited Mukesh Ambani. AFP[/caption]
KG-D6 averaged at 14 million standard cubic metre per day (mscmd) of gas and 5,930 BOPD of oil/condensate during the nine months ending 31 December, the company said. “Fall in production is mainly attributed to geological complexity, natural decline in the fields and higher than envisaged water ingress,” it said.
Shale gas operations in the US, where development growth momentum continued, also helped the company. It recorded a over 9 percent sequential growth in wells drilled and 11 percent growth in wells put on production. Aggregate wells drilled and put on production have grown 32 percent and 39 percent, respectively, during the nine month period, the company said.
Impact Shorts
More ShortsInvestors upbeat
Investors are, however, upbeat about the stock.
The reason for this is the likely increase in the gas prices from 1 April. The government has notified the guidelines for domestic natural gas pricing. This creates an enabling environment for investments in the hydrocarbon sector, the company said.
“Widening demand-supply gap necessitates investments. As per IEA, India needs $176 bn of upstream investments over 2012-2035. In 2013, Asian spot LNG prices averaged $16/MMBTU. Incremental demand from China, other Asian markets on environmental concerns would keep LNG markets tight in 2014. Supply chain remains constrained,” the company said.
As per the new pricing formula of the Rangarajan Committee gas prices will be increased from $4.2 per mBtu (million British thermal units) to about $8.4 per mmBtu.
According to an article in_Bloomberg Businessweek,_S&P estimates that the new price will allow RIL to increase their pretax profits by close to 7 percent even though production from the KG basin has been falling.
“Income from their cash will play a vital role in profitability till the time earnings from higher gas prices start kicking in,“Kamlesh Kotak, Mumbai-head of research at Asian Markets Securities Pvt, is quoted in the article as saying.
Approved in June 2013, the Rangarajan Committee’s pricing plan will come into effect just after the current contract with RIL for gas from the KG basin expires. The pricing formula will be in effect for 5 years from April 2014.
The committee had recommended reviewing the prices every month but to curb volatility, the government changed the timeline to every quarter. Estimates by Barclays Equities Research suggest thatthe prices will rise to $ 9.1/mmBtu in the following year and then to $ 9.4/mmBtu in 2016-17.
So, the company’s profitability will increase along with the gas prices. There have been media reports that the company is making efforts to increase gas production from KG D6.
Head of BP India, a partner of RIL in KG D6, had told CNBC-TV18 in a recent interview that the plan is to increase the production from the block by 50 percent to 16 mscmd by December 2014.
“This is a time to go and buy into Reliance Industries somewhere between now and April. The gas price hike, possibly the quantum increase as far as production goes of gas and these two will be the triggers apart from the entry into telecom where honestly not much can be said right now,“Mehraboon Irani of brokerage Nirmal Bang told CNBC-TV18 in a recent interview.
The company, however, has said after the earnings that it would refrain from further investments in its gas blocks until it gets the green light from the government.
Disclosure: The Reliance Group has funded the promoter of Network18, which publishes Firstpost
 "Russian drones over Poland: Trump’s tepid reaction a wake-up call for Nato?")
 "As Russia pushes east, Ukraine faces mounting pressure to defend its heartland")
 "Why Mossad was not on board with Israel’s strike on Hamas in Qatar")
 "Turkey: Erdogan's police arrest opposition mayor Hasan Mutlu, dozens officials in corruption probe")
 "Russian drones over Poland: Trump’s tepid reaction a wake-up call for Nato?")
 "As Russia pushes east, Ukraine faces mounting pressure to defend its heartland")
 "Why Mossad was not on board with Israel’s strike on Hamas in Qatar")
 "Turkey: Erdogan's police arrest opposition mayor Hasan Mutlu, dozens officials in corruption probe")
](https://images.firstpost.com/wp-content/uploads/2013/12/mukesh-afp2.jpg){kind=link}