Reliance Industries: Sequential recovery continues

Strong operational performance in Q3 may drive earnings upgrades for FY13

Investors could not have asked for a better beginning to the earnings season. After Infosys beat the market with its better-than-expected revenue trajectory in the December 2012 quarter (Q3), it was the turn of Reliance Industries Ltd (RIL) to surprise the markets. The country’s largest company by market capitalisation, has effectively silenced its critics by beating consensus estimates by a long shot.

The Street was expecting RIL to report a post-tax profit of Rs 5,070 crore in Q3, but it has reported Rs 5,502 crore, up 24 per cent annually and 1.7 per cent sequentially. Interestingly, the company has managed to beat profit estimates even though its other income declined to Rs 1,740 crore in Q3 from Rs 2,112 crore in the June 2012 quarter. Profitability in Q3 has been driven by the core businesses, namely, refining and petrochemicals.

RIL has beaten Street estimates on every count, including refining margins. After Essar Oil reported gross refining margins (GRMs) of $9.75 per barrel, the market was waiting to see if RIL could match it. Even though consensus GRM estimates were at $8.7, the company earned $9.6 for every barrel of crude oil it processed. According to Emkay Global, sequentially refining margins for RIL remained flat despite fall in benchmark Singapore GRMs, which stood at $7 per barrel for Q3.

RIL’s petrochemicals business too, is showing signs of recovery, as indicated by the management in Q2. Compared to the corresponding period in the previous year, demand for polyester products is up 9.5 per cent. The company has said demand for PET increased by 11.8 per cent, mainly driven by good beverage (bottles) demand and pre-stocking by downstream producers in Q3 for the ensuing season. Demand for PSF grew 5.6 per cent on a year-on-year (y-o-y) basis, but was limited by the ongoing power shortage in key consumption states. Volumes for PFY increased 10.4 per cent y-o-y mainly due to the low-base effect.

This uptick in demand is reflected in the margins, too. Sequentially, the petrochemical’s Ebit margin has moved up 90 basis points to 8.8 per cent and the segment’s Ebit stands at Rs 1,930 crore. Over the last two years, RIL has come under a lot of flak as a large part of its profits was accounted for by other income, but Q3 shows that operationally there’s an uptick in performance. After Q3 numbers, an upgrade in its FY13 earnings is a distinct possibility. So far, merely 38 per cent of analysts have a ‘buy’ call on the stock, but this may soon change as earnings quality indicates that a recovery is underway. Post-results, RIL’s GDRs jumped almost four per cent to $34.7 apiece taking the day’s gain to six per cent on Friday. The key concern though, remains the oil and gas exploration business, where production has been under stress and earnings are down both annually and sequentially.