RIL net profit drops 13.6%, goes in for biggest buyback

On a day the country’s most valued company, Reliance Industries Ltd (RIL), reported its first net profit drop in the last two years, it tried to cheer investors by announcing its Rs 10,440-crore buyback plan. Analysts, however, see the scrip reacting unfavourably in the next session on Monday, despite the offer of up to 10 per cent premium on Friday’s closing price.

Margin compression in refining and petrochemicals businesses and lower gas output from its Krishna-Godavari block led RIL to post a 13.6 per cent drop in net profit for the October-December quarter of 2011-12.

The company’s net profit stood at Rs 4,440 crore in the quarter, compared to Rs 5,136 crore in the corresponding period last year. The company’s revenue, however, rose 42.3 per cent to Rs 85,135 crore.

RIL Chairman and Managing Director Mukesh Ambani blamed the weakness in economic conditions for reduced earnings, particularly in the refining and petrochemicals businesses. “Notwithstanding these challenges, RIL has delivered reasonably good results, with high operating leverage. Our focus remains on enhancing shareholder value by leveraging an exceptionally strong balance sheet, operating top decile assets and investing prudently in growth engines,” he said in a statement.

RIL’s board of directors also approved the buyback of up to 120 million fully paid-up equity shares of Rs 10 each, at a price not exceeding Rs 870 an equity share, payable in cash, up to an aggregate amount not exceeding Rs 10,440 crore, from the open market.

The maximum buyback price represents a nearly 10 per cent premium on the last closing price. Analysts felt a 10 per cent premium on the buyback price of Rs 870 would not be attractive for the investors who had entered the scrip at much higher valuations. “The company will buy back at the open market price. So, Rs 870 is the maximum. Investors should not think that their shares would be picked up at Rs 870,” said Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities.

Today, the company’s shares gained 1.04 per cent to Rs 793.35, on a day when the Sensex rose 95.27 points to close at 16,739. The company released its third quarter numbers after market hours.

“Today’s results are disappointing. Market may react negatively to this. I will not be surprised if the share reaches around Rs 750 on Monday. Even the news of buyback of shares may not salvage the stock,” said S P Tulsian, an independent equity analyst.

Analysts had predicted RIL might report a discount to Singapore complex margin, for the first time ever in a decade. Gross refining margins (turning every barrel of crude oil into fuel) for the company stayed at $6.8 per barrel, against $9 barrel, during the October-December quarter of last financial year.

Due to weaker gasoline and naphtha cracks, Singapore GRM had contracted 12.3 per cent on a sequential basis to an average of $7.9 per barrel during the same period. Analysts say a drastic move in naphtha, gasoline spread fuel oil has resulted in GRM slippage.

Besides, margins were impacted by higher crude oil prices and a narrowing spread between light and heavy crude oil prices. Analysts expressed concerns that net profit could have been lower, but for other income, which stood at Rs 1,717 crore, up Rs 976 crore. Naphtha, according to analysts, constitutes about 17 per cent of RIL’s product slate, compared with only 5 per cent for Singapore GRM’s product slate. Similarly, fuel oil has a higher proportion in Singapore and lower product slate in RIL. While RIL’s petrochemicals revenues fell 6.1 per cent to Rs 19,781 crore during the quarter, its oil and gas exploration business posted a 32 per cent decline in revenue, largely on account of a lower production at its main D6 offshore block.

RIL's growth outlook has been impacted by its falling gas output. The company is producing around 40 mscmd of gas — 33 per cent lower than the 60 mscmd it was producing a year earlier.