Quality of RIL earnings disappoints

Revival in the petchem cycle expected to be delayed by a few quarters

For the last few quarters except March 2013 that was relatively flat, Reliance Industries has been showing a sequential improvement in its petrochemical and refining businesses, even as the exploration business continues to drag.

For the June 2013 quarter, even though the company beat the Street’s estimates on net profit, the quality of earnings have disappointed. The main reason behind the disappointment is the flat petrochemical margins.

The Street was expecting petchem margins to improve on government action at home on tariffs and a pick-up in demand from China.

The petchem cycle was expected to revive after the change of leadership in China happened, but the first quarter numbers of RIL indicate that the petchem cycle is not likely to revive in a hurry.

In the first quarter, RIL’s topline has grown by 4.6% sequentially to Rs 90,589 crore but net profit is down 4.2% to Rs 5,352 crore. The impact of lower oil prices and a weak rupee is not fully visible in earnings.

The company has managed to beat estimates largely due to other income, which has risen 33% to Rs 2,535 crore compared to last year; it is up 13% sequentially.

Analysts say that RIL's petchem performance has come as a disappointment even as refining numbers are largely along expected lines. Sequentially, the margins for the petchem business have remained flat at 8.6% even though they are up 60 basis points year-on-year. Compared to last year, revenues from petchem increased by 0.5% to Rs 21,950 crore on higher price. The company says the growth in sales was partly offset by a marginal fall in volumes.

Nitin Tiwari of Religare Institutional Research says the petchem margins disappointed as the government had increased import duty on these products from five% to 7.5%, but this impact is not visible in the segment’s earnings. Petchem segment’s performance is likely to remain volatile.

It is the same for refining as well. The company’s gross refining margins (GRMs) seem to oscillate between $7.6 and $10 per barrel. RIL’s GRMs have fallen from $10.1 in the fourth quarter of FY13 to $8.4 in Q1 of FY14. The segment’s EBIT margin is down to 3.6% in Q1 from 4.5% in Q4'FY13. The impact of the weak rupee is again not fully visible in the company’s earnings profile, believe analysts.

The company continues to report contraction in revenue and profit from the exploration business on falling gas output. However, with gas prices being revised upwards from 1 April, 2014, and RIL's measures to augment gas production form KG D6 basin, this business should see an uptick from FY15.