Reliance Industries: Volumes drive top line

Except the exploration and production business, growth visibility in refining and petrochemical margins is low.

Reliance Industries Limited (RIL) reported net revenues of Rs 57,570 crore, up 120.73 per cent year-on-year (y-o-y), for the fourth quarter ended March 2010. Gross refining margins (GRMs) were 27 per cent higher quarter-on-quarter at $7.5/bbl, but were around $1 below analysts’ expectations. They are pegged at $8/bbl for 2010-11.

Increased volumes with additional commissioned capacities boosted refining revenues in the fourth quarter of the financial year 2009-10 (up 165 per cent y-o-y). Petrochemicals business reported an improved performance, helped by low inventory levels, rise in prices and polymer and polyester product margins. Exploration and production (E&P) revenues jumped six fold due to ramp up of KG-D6 gas production.

Total expenditure rose 138 per cent as the raw material costs jumped 146 per cent. Consequently, operating profit growth came in at Rs 9,136 crore in the March quarter. With commissioning of two new projects, depreciation costs more than doubled and ate into the net profit growth that stood at 30 per cent to Rs 4,710 crore.

Going ahead, analysts remain unconvinced about the sustainability of the strong rebound of refining and petrochemical margins. “Though, in the short term, GRMs may improve due to large scale maintenance shutdowns in Asia. We do not expect them to increase much in the medium term,” states a report from Motilal Oswal.

Petrochemical margins are also expected to be under pressure due to new capacity additions in the Middle East and China. Rupee appreciation could further aggravate the situation. Outlook for E&P business remains strong with further ramp up in production and new discoveries.

With E&P going strong and refining possibly past the worst, analysts expect the petrochemicals capacity glut and possible RNRL case judgement as the key factors weighing on valuations. However, its joint venture with US-based Atlas Energy is a positive move, as it will enable entry into the high-potential US market.

The stock closed at Rs 1,071.25, down 1.6 per cent from previous closing and trades at price to estimated earnings multiple of 15x and 13x for FY11 and FY12 earnings estimates.

With contributions from Priya Kansara Pandya & Sunaina Vasudev