Quality of Reliance Industries' earnings disappoints

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

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

For the June quarter, though the company beat the Street's estimates on net profit, the quality of earnings has been disappointing. The main reason is flat petrochemical margins. The Street was expecting petchem margins to improve on government action at home on rates and a pick-up in demand from China. The petchem cycle was expected to revive after the change of leadership in China but the first quarter numbers of RIL indicate this is not likely soon.

In the first quarter, the top line grew by 4.6 per cent sequentially to Rs 90,589 crore but net profit is down 4.2 per cent at 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 per cent to Rs 2,535 crore compared to last year; it is up 13 per cent sequentially.

Analysts say RIL's petchem performance is a disappointment even, as refining numbers are largely along the expected lines. Sequentially, margins for the petchem business have remained flat at 8.6 per cent, though up 60 basis points, year-on-year. Compared to last year, revenues from petchem increased by 0.5 per cent to Rs 21,950 crore on a 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 per cent to 7.5 per cent but this impact is not visible in the segment's earnings. The segment's performance is likely to remain volatile.

It is the same for refining. 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 first quarter of the current financial year. The segment's earnings before interest and taxes margin is down to 3.6 per cent in Q1 from 4.5 per cent in Q4FY13. The impact of the weak rupee is again not fully visible in the company's earnings profile, according to 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 April 1, 2014, and RIL's measures to augment gas production from the KG-D6 basin, this business should see an uptick from FY15.