RIL Q2 preview: Gross refining margins likely to moderate

Higher refining throughput, better petrochem margins expected to help profitability, say experts

Reliance Industries (RIL) is expected to see its gross refining margins (GRM) decline in the September quarter after repeating a seven-year high in the June quarter, even as analysts expect its petrochemical margins to remain healthy and offset the fall in GRMs.

In a Bloomberg poll, five analysts estimated a consolidated net profit of Rs 7,268 crore and revenue of Rs 62,920 crore. In the September 2015 quarter, the company reported a consolidated net profit of Rs 6,720 crore and turnover of Rs 75,117 crore. RIL will announce its financial results for the July-September 2016 quarter on October 20.

WHAT’S IN STORE?

• Estimated  consolidated net profit of Rs 7,268 crore
• Estimated  revenue of Rs 62,920 crore
• Gross refining margins expected at  $9.1-$10.4 per barrel
• Refining throughput at highest ever 118%
• Petrochemical margins to remain healthy

Analysts expect the company’s GRMs to be $9.1-10.4 per barrel in the September 2016 quarter, lower than the $11.5 per barrel reported in the previous quarter, which was a seven-year high. However, the company’s June quarter GRMs were ahead of analyst estimates, leaving room for the possibility of a surprise in the September quarter as well.

“Brent averaged $45.7 per barrel in the quarter, almost flat sequentially. After being subdued in July 2016, Singapore refining margin increased in August-September 2016 resulting in almost flat GRM of $5.1 per barrel in the quarter. The refiners had huge inventory gains in the previous quarter, which helped their GRMs and profits. However, lack of the same is expected to hit the refiners hard,” Swarnendu Bhushan and Harshraj Aggarwal wrote in an Elara Capital report.

Pressure on the refining business is also likely to pull down the company’s standalone performance sequentially. The firm is likely to report its first sequential decline in standalone profit after six consecutive quarters. “After six consecutive sequential earnings increases, we expect RIL’s standalone earnings to moderate two per cent quarter-on-quarter, mainly due to weaker refining. But, RIL may surprise again,” analysts Anil Sharma and Ravikumar Adukia wrote in a Nomura Research report.

In the September 2015 quarter, the company reported a standalone net profit of Rs 6,561 crore and revenue of Rs 64,515 crore. Sequentially, the company’s standalone net profit was at Rs 7,548 crore in the June 2016 quarter.

The firm’s refining throughput and petrochem margins are expected to remain robust. “Petchem margin of 15.2 per cent compared to 12.7 per cent is expected, while volume is to increase eight per cent year-on-year to 6.7 mt (million tonnes),” analyst Sudeep Anand wrote in an IDBI Capital report.

RIL is expected to report its highest-ever utilisation in the refining segment at 118 per cent in the September quarter. “Refining throughput is expected to be 6-8 per cent higher quarter-on-quarter)/ year-on-year,” wrote Jal Irani, Yusufi Kapadia and Vivek Rajamani in an Edelweiss Research report.

There could be a likely lag effect of the rise in oil prices in the company’s shale segment on its September quarter performance. “We estimate consolidated profit after tax of Rs 7,100 crore, which will benefit from last quarter’s 33 per cent uptick in oil price in the shale segment as shale consolidates with a quarter lag,” the Edelweiss Research report noted.

Analysts have not factored in any revenue generation from RIL’s new telecom business launched in September, as services under this vertical are at present being offered free to customers.