Reliance Industries performance in Q3 stable

Despite GRMs being hit by volatility in oil prices, it managed to post net profits in line with estimates

Reliance Industries (RIL) posted standalone net profit of Rs 5,085 crore, in line with Street estimates, helped by other income, even as revenues at Rs 80,196 crore fell much short of Bloomberg consensus estimates of Rs 85,119 crore. The earnings before interest tax depreciation and amortisation (Ebitda) stood at Rs 7,208 crore, though short of the Rs 7,658 crore estimated by Bloomberg.

 

The disappointment was on account of gross refining margins (GRMs) at $7.3 a barrel, largely due to higher inventory losses. While RIL had reported GRMs of $7.6 and $8.3 a barrel in the year-ago and previous quarter, respectively, analysts had estimated these at $7.6-7.7 a barrel for the December quarter. Also, the premium to the benchmark Singapore GRMs declined, as the latter averaged $6.3 a barrel, higher than $4.3 and the $4.8 in the year-ago and the previous quarter, respectively.

The quarter was challenging for the company, looking at the volatility in the oil and gas prices. Brent Crude is down from highs of more than $100 a barrel in June 2014 to sub-$50 a barrel levels and was largely responsible for the fall in top line. This poses challenges to RIL, that sees a majority of its revenue coming from the refining and petrochemical segments.

The refining revenues at Rs 81,777 crore during the quarter contributed 71 per cent to gross consolidated revenues, while petrochemicals' share was 20 per cent. At PBIT (profit before interest, tax) levels, petrochemicals contributed Rs 2,064 crore slightly lower than Rs 2,115 crore in last year’s same quarter, as petchem margins improved, led by favourable naphtha cracks. The refining segment added Rs 3,267 crore to PBIT slightly higher than the Rs 3,240 crore in the year ago quarter. Oil and gas contributing 12.7 per cent at PBIT level (Rs 832 crore) also was higher than last year’s same quarter’s Rs 607 crore.

On a consolidated basis, thus, RIL’s revenues at Rs 93,528 crore fell 20.7 per cent, while profits at Rs 5,256 crore were lower than Rs 5,496 crore in the year ago quarter.

The volatility in the oil prices has triggered  concerns over RIL’s stock that has corrected more than 10 per cent since the start of the December’14 quarter, before gaining some lost ground in past few days.

Though concerns on company’s shale gas prospects and launch of telecom venture (Reliance Jio) that has higher start-up costs and longer break-even time are likely to weigh in the near term, some benefits from a strengthened dollar are also likely to accrue. The company will see its investments in the core refining and petchem segment accrue benefits to volumes by end-FY16. Nevertheless, the current stock at Rs 862 seems attractive. Analysts at Morning Star, while maintaining that Reliance’s core business is highly cyclical and does not provide a core competitive advantage, have a fair value of Rs 950. Analysts at Kotak had arrived at a target price of Rs 1,110, while Nomura has pegged it at Rs 1,115.