Refining drives RIL's Q4 performance

GRMs at $10.1/bbl beat Street estimates; FY16 to yield more gains from capacity expansion

Conglomerates may be called ‘corporate chaos’, but sometimes it’s the chaotic diversity that comes to the rescue. The March quarter performance of Reliance Industries (RIL) is evidence of this. Despite falling crude oil prices and overall weakness in the commodity markets, Reliance has posted a record quarterly profit. Even as revenue declined 33 per cent year-on-year (y-o-y) and 26.4 per cent sequentially to Rs 70,863 crore, net profit in the March quarter grew 21.4 per cent sequentially and 11.3 per cent y-o-y to Rs 6,381 crore.

The March quarter earnings were driven robust performance of the refining business, which saw refining earnings before interest and taxes (Ebit) grow 18.2 per cent, even as revenues declined 16.3 per cent. Revenue decline needn’t be a cause of concern as Reliance is largely a converter and, as a result, its margins are more critical to profitability than top line growth, says Mayuresh Joshi of Angel Broking.

Though crude prices declined, RIL has managed to expand gross refining margins (GRMs) to $10.1 a barrel (bbl) against $7.3 a bbl in the December quarter and $9.3 a bbl in the year-ago period.

Consequently, the Ebit margin for the segment has doubled sequentially and annually to 8.7 per cent. While the strong performance of the refining segment was expected, as the benchmark Singapore GRMs had stayed around $8.5 a bbl in the March quarter, RIL has beaten market estimates by posting GRMs above $10 a bbl. the Refining segment’s Ebit grew 50 per cent sequentially and 23.7 per cent y-o-y to Rs 4,902 crore. RIL’s GRMs are expected to stay around current levels in FY16, too. Also, given that its petcoke gasification project gets completed by the end of FY16, it would add another $1.5-2 a bbl to GRMs.

The petrochemicals segment remained weak but higher volumes and margins propped the segment’s earnings. While revenues declined on lower crude and feedstock prices, petchem’s Ebit declined marginally three per cent sequentially and 6.8 per cent y-o-y to Rs 2,003 crore. Petchem’s Ebit margin expanded 20 basis points (bps) sequentially and 110 bps y-o-y. Analysts claim petchem’s performance was weak but higher volumes managed supported earnings growth.

Shale has been a ‘disaster’ for the company in the March quarter as revenues declined 14 per cent sequentially and 6.5 per cent y-o-y. Shale gas segment’s Ebit declined 41 per cent sequentially and 23 per cent y-o-y. Analysts believe any move to sell down these assets would be viewed positively by the market.