Reliance Industries ends FY16 on a strong note

Petchem gains offset some sequential softness in refining

Reliance Industries’ (RIL) performance for the March 2016 quarter was ahead of Street estimates across parametres. While revenues and net profit beat Bloomberg consensus estimates by four per cent, earnings before earnings, interest, taxes, depreciation and amortisation (Ebitda) level was higher at 12 per cent. Revenues came in at Rs 60,252 crore (11 per cent lower than year-ago quarter), while consolidated net profit was Rs 7,398 crore, up 16 per cent year-on-year.

The good show was largely led by petrochemical (petchem) segment’s performance. The segment, which contributed 26.4 per cent to the overall revenues, registered a profit of Rs 2,713 crore, which was up 35 per cent over the year-ago quarter and four per cent on a sequential basis. Thus, the company benefited from stronger petrochemical spreads offsetting sequential decline in gross refining margins (GRMs). The GRMs at $10.8 a barrel came down from the peak of $11.5 in the previous quarter. GRMs remained under pressure as the benchmark Singapore GRM averaged $7.7 a barrel compared to $8 in the December 2015 quarter. Diesel cracks are at five-year lows at $8-9 a barrel on falling demand. However, gasoline cracks at $16 a barrel are helping refiners as demand remains robust.

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In this backdrop, companies such as RIL are gaining from their high-complexity refineries, which allow them to take advantage of the light/heavy crude differential and alter the product and adapt to changing demand dynamics, say analysts at Morgan Stanley. RIL also gains through its integrated petchem operations as refining output of naphtha/reformate is used to make petrochemicals, allowing it to maximise overall margins.

Thus, with petchem offsetting some declines in the refining segment (60.6 per cent of gross revenues), the overall performance of the company remained strong. Also, with the results coming ahead of Street estimates, the stock is likely to gain on the bourses on Monday, say analysts. The stock closed flat at Rs 1,038.75 on Friday.

However, major upsides in the near-term might remain capped looking at lower benchmark Singapore margins and lack of clarity on Reliance Jio launch, feels Nitin Tiwari at Antique Stock Broking. Nevertheless, the stock can perform in the longer term, adds Tiwari.

While there may be concerns and limited clarity on the company's telecom investments, RIL will benefit from investments of $30 billion or Rs 1.8 lakh crore in refining and petchem spread over 3-5 years announced in 2014. RIL’s downstream expansion projects are likely to start full-year operation in FY18. Morgan Stanley analysts estimate $2.5 billion in incremental Ebitda in the first full year of operation even in a low $40 per barrel oil price environment, implying project return on capital employed of 10 per cent.