RIL exits FY14 on weak note, profit after tax rises 4.7%

Shale gas gains and higher gas prices may trigger earnings upgrade in FY15

For a long time, analysts have maintained Reliance Industries (RIL) lacked any trigger that would result in a re-rating of its earnings estimates. As the production of gas from KG-D6 started falling and the petchem cycle weakened, earnings growth has lacked any major trigger. The company ended FY14 with a 8.1 per cent year-on-year (y-o-y) growth in revenues and 4.7 per cent growth in net profit. In the fourth quarter, sales grew 12.9 per cent, y-o-y, to Rs 97,807 crore but declined 8.1 per cent sequentially.

RIL's net profit growth, both y-o-y and sequential, continues to be in low single digits. The fourth quarter's net profit was flat y-o-y at Rs 5,631 crore, in line with the market's estimates. The figure could have been lower, had it not been for higher gross refining margins (GRMs). While the market was expecting the company's GRMs to come in at $8.6 a barrel, the firm reported $9.3 a barrel.

This made up for the weakness in its oil and gas business. Many analysts have maintained for long that elephants can't dance. But the company's commentary in the fourth quarter suggests the much-needed boost to earnings could come from shale gas earnings and higher gas prices. The market has not factored in the retail business and shale gas earnings so far but will have to do so in the coming quarters.

While the performance of the oil and gas business continued to disappoint as revenue declined 18.2 per cent sequentially and 11.3 per cent annually to Rs 1,417 crore, analysts believe earnings could pick up once gas prices are revised and production gains momentum. The company has not given any guidance on gas volumes yet. The oil and gas business has seen earnings before interest and taxes (Ebit) margin contract to 26.7 per cent from 31.2 per cent in the third quarter and 28.8 per cent a year ago.

A big positive has been the shale gas revenues have grown 47 per cent to $893 million in FY14, while earnings before interest, taxes, depreciation, and amortisation (Ebitda) has grown 37 per cent to $659 million. Analysts believe that the Street might not be able to ignore shale gas earnings in the coming quarters.

Revenues grew 12.5 per cent, y-o-y, to Rs 87,624 crore, but declined 8.2 per cent sequentially. Though the volume of crude processed declined sequentially, the segment's Ebit grew 26 per cent sequentially on higher GRMs of $9.3 a barrel against $7.6 a barrel in the third quarter.

The petchem business continues to stagnate. The segment's Ebit margin came in at 8.6 per cent and the production stayed flat at 5.3 million tonnes both sequentially and y-o-y. The Street will look forward to the details on the launch of Reliance Jio, higher prices for domestic gas and earnings boost from shale gas.