Reliance Industries is ambling along, quarter after quarter. While the company has managed to marginally beat the Street’s net profit expectations, its business segments continue to face challenges. This is reflected in the steadily rising share of other income. Of the company’s profit after tax of Rs 4,473 crore in June 2012 quarter, the share of other income stands at 42.5 per cent. In the corresponding quarter in FY12, other income’s share was at 19 per cent. In the fourth quarter of FY12, other income’s share was at 54 per cent. By any measure, the large contribution of other income to overall profits isn’t a good sign. According to the company, other income has increased by 76.6 per cent from Rs 1,078 crore to Rs 1,904 crore on a year-on-year (y-o-y) basis on account of larger cash balance.
Though there is an improvement in earnings profile as profits from operations was Rs 4,313 crore, an improvement of 10.5 per cent on sequential basis, analysts say the company continues to face challenges across all its businesses. While the company’s cash pile will keep increasing, it will be difficult for it to grow its core business earnings as there are few triggers.
The company’s margins across businesses have declined on a y-o-y basis. Refining margins are down 180 basis points to 2.5 per cent. Margins in the petrochemicals business are down sharply by 410 basis points. Oil and gas is the only segment where there is a marginal improvement in margins, which are up by 100 basis points, but then the declining volumes have been a major worry for the company.
The fall in gas production has largely contributed to the 21 per cent y-o-y fall in net profit. Revenues from oil and gas (exploration and production) have fallen by 35.6 per cent y-o-y to Rs 2,508 crore. The segment’s earnings before interest and taxes (EBIT) too, is down 34 per cent to Rs 972 crore.
With Europe and the US facing growth issues, the refining business too, will remain under pressure. The market believes that the refining boom is over and the developed countries will not go back to consuming the same quantities of jet fuel and diesel as they used to, at least not anytime soon. Though the company has managed to hang on to gross refining margins of $7.6 sequentially, which is better than what its global and Asian peers have achieved (and ahead of Street’s expectations of $7), the pressure remains.
Analysts say given the company’s export focus, a quick revival in the company’s fortunes is unlikely. Going forward, what could help the company are higher gas prices or increase in gas production or a big ticket acquisition. But then, most analysts don’t see these happening this year.