Petchem to support RIL earnings; analysts expect refining margins to soften

RIL will announce its financial performance for Q1 on Friday, & the street will look for more details on the rollout and investment of the home-to-fibre, which the company announced earlier this month

Oil to telecom major Reliance Industries (RIL) is expected to report a steady performance for the quarter ended June 30. This would be on the back of higher petrochemical volumes, expected to 

partly offset a softening in the refining segment.

In the new-age businesses of retailing and telecom (digital services), analysts expect earnings to slow down as compared to the March quarter.

RIL will announce its financial performance for Q1 on Friday. With its recent announcement on home-to-optic fibre at the company's annual general meeting (AGM) earlier this month, the Street will look for more details on rollout and investment.

In a Bloomberg poll, six analysts estimated a net profit of Rs 94.7 billion and nine of consolidated revenue at Rs 1.16 trillion, a year-on-year increase of 39 per cent and 4.3 per cent, respectively.

With the expected softening in the refining segment, RIL is expected to report gross refining margins or GRMs of around $10 a barrel, lower from the $11 reported in the March quarter, and $11.9 a barrel in the year-ago period. The weakness is expected on account of the softening in light distillate yields and liquefied petroleum gas margins.

Since refining accounts for a large chunk of its financials (half of consolidated revenue and 55 per cent of profit in FY18), weakness in its performance typically has a bearing on the consolidated numbers. “We expect RIL to report GRM of $10.3 a barrel,” analysts at Motilal Oswal Securities (MOSL) wrote in a results preview note.

However, this is expected to be partly offset by gains in the petchem business, which contributed 23 per cent to revenue and 40 per cent to profit in FY18.

“Higher petchem volumes (along with stable margins) should offset softness in the refinery business' earnings before interest, taxation, depreciation and amortisation (Ebitda). Jio (the telecom business) might report flat Ebitda sequentially, while retail may witness some decline after a strong fourth quarter,” analysts with Credit Suisse wrote in a July 12 note.

Among other factors, RIL’s other income is expected to drop sharply on a year-on-year basis, estimates MOSL. From Rs 32.2 billion, this is pegged at nearly Rs 21.4 billion, says the brokerage. The tax rate is also seen rising sharply. These two factors are likely to weigh on net profit growth; at an estimated four per cent, this would be the lowest in five quarters.

In the new-age businesses, the March quarter saw RIL report improved financial performance for both Jio and the retailing segment. While both are expected to fare well, analysts expect a sequential moderation in their profits. The retail business in the March quarter saw revenue increase 134 per cent year-on-year and earnings before interest and tax (Ebit) was up 291 per cent.

“Jio’s Ebit is projected to decline to Rs 10.3 billion, down 31 per cent sequentially on further average revenue per unit dilution to Rs 130, from Rs 137 in the March quarter,” analysts with Bank of Baroda Capital wrote in a July 10 note.

RIL had on July 5 announced a plan for a home-to-fibre business under Jio Giga Fiber at its AGM. In the management takeaways on Friday, the Street will look for more details on rollout and investment for the segment. In addition, analysts will look for a timeline in the impending deal to acquire Reliance Communications’ assets.