RIL's Q2 numbers: Subdued refining margins are just a temporary blip

Steady outlook for core energy businesses, fast-growing digital services and retail are keeping analysts bullish on earnings trajectory

Reliance Industries’ (RIL’s) September quarter (Q2) numbers were a mixed bag with its retail and digital services (telecom; Jio) businesses continuing to post strong growth, while its core refining business performance was a bit disappointing amid high expectations.

While the street was expecting the per barrel gross refining margins (GRM) to trend down to about $10 from $12 a year ago and $10.5 in previous quarter, it came even lower at $9.5 for Q2. Softness in benchmark Singapore GRM, maintenance shutdown at RIL’s refinery and sequential decline in light-heavy crude oil price differential were reasons for the lower number. Analysts, however see this as a temporary blip. RIL still outperformed Singapore GRM by $3.4 per barrel. During Q2, Reuters Singapore Complex GRM was down 26 per cent year-on-year (up 2 per cent sequentially) to $6.1 per barrel.

Analysts feel that RIL’s GRM will improve from here on, as substantial investments in refining and petrochemicals businesses over past few years have started yielding benefits. RIL’s pet-coke regasification project (PCG), for instance, is expected to boost its GRM by $2 a barrel over next two quarters, while new regulations will drive margins from second quarter of FY20. Pet-coke replacing LNG will also reduce fuel costs, says an analyst at a domestic brokerage, who believes RIL can easily clock GRMs of $11.5 on sustainable basis. In the longer run, as OMO 2020 Sulphur regulations start driving GRMs, analysts at Goldman Sachs see peak GRM potential of $18-19 in 2020.

On a positive note, the petrochemicals’ (Petchem) segmental profits, up 62 per cent year-on-year led by higher volumes from capacity expansions, strong polyester chain deltas, stable polymer deltas, and feedstock cost optimisation are expected to maintain the trajectory. Deutsche Bank Research estimates Petchem Ebitda or earnings before interest, tax, depreciation and amortisation, to increase further in the current quarter on higher volumes from the refinery off-gas cracker project.

Abhijeet Bora of Sharekhan too remains optimistic on the refining and petrochemicals margins led by ramp-up of recently commissioned downstream projects and expects sustained improvement in digital services business.

In digital services, Jio saw net subscriber addition of 37 million – its fastest pace ever. Average revenue per user (APRU), despite the monsoon hungama offer, dropped two per cent sequentially to Rs 131, better than most estimates. RIL’s acquisition of controlling stakes in cable players, Den and Hathway will give it access to close to 27 million cable/broadband subscribers and thousands of local operators, driving its telecom ambitions further. Retail continued to grow at a robust pace with revenues, excluding petroleum and connectivity businesses, surging 147 per cent year-on-year in Q2.

With outlook of energy and consumer businesses remaining robust, analysts remain bullish on RIL. After earnings growth of 19-21 per cent in FY17-18, Nomura expects a stronger 33 per cent growth in FY19, driven by Petchem and 21-22 per cent growth during FY20-21.