Strong gross refining margin to boost Reliance Industries' profit

Refining giant Reliance Industries (RIL) is expected to post a strong quarterly performance in the third quarter of FY16, riding on high refining margins, which will help offset the weakness in its petrochemicals and exploration & production (E&P) segments.

The company is to post its December quarter results on Tuesday.

A Bloomberg poll of analysts has estimated the firm's consolidated net profit at Rs 7,100 crore - an year-on-year (y-o-y) growth of 35 per cent - and net sales of Rs 60, 686 crore, a drop of 35 per cent, y-o-y. The company had posted a net profit of Rs 5,256 crore in the corresponding quarter of FY15.

However, for the September 2015 quarter, RIL had beaten Street expectation by reporting a 12.5 per cent rise in consolidated net profit at Rs 6,720 crore. RIL operates in petroleum refining, petrochemicals, oil & gas E&P, telecom, and retail sectors.

Analysts expect RIL to post its fourth successive $10-plus gross refining margin (GRM) for the quarter. The GRM is likely to be above $11 for the first time in seven years. GRM measures the earnings from turning every barrel of crude oil into fuel.

RIL, which typically reports a GRM of $2-3 a barrel above the benchmark Singapore complex GRM, posted a premium of $4.3 per barrel in the December quarter.

Refining and marketing accounts for 65 per cent of RIL's overall profit and nearly 70 per cent of the overall revenue.

"Expect 3Q (third quarter) GRMs at $11.2 versus $10.6 in 2Q (new seven-year high) due to sequentially higher Singapore GRMs ($8 versus $6.3). Petchem profitability could decline slightly. Interests costs to increase sequentially due to forex depreciation," said Citi Research in its note.

Brent crude prices averaged $45 a barrel in the third 2015 quarter, against $50 a barrel in the second quarter of FY16 and $62 a barrel in the first quarter this year. Crude price is down 40 per cent y-o-y and 13 per cent quarter-on-quarter (q-o-q).

The petrochemicals segment, on the other hand, could report weaker earnings as petrochemical prices declined q-o-q, along with crude oil prices. "In addition, due to stronger naphtha prices, the petchem margins also suffered a contraction," said Antique Stock Broking in its note.

Petchem has the second biggest share in the company's overall revenues and net profit at 30 per cent.

On the E&P front, analysts estimate the growth to be flat compared to the last quarter, at 11.5 million metric standard cubic metres of gas per day and 5,100 billion of oil per day from the KG-D6 block. Weaker crude oil price is likely to impact earnings negatively.

Edelweiss Research said in a note, "We expect losses from shale to be compensated by an improved performance from retail."

RIL's scrip closed at Rs 1,073.15 a share, up 1.13 per cent on the BSE last week.