RIL: Higher GRMs to boost earnings in Q4

Benchmark Singapore GRMs rise to $8.7/barrel in Q4 from $6.3 in Q3

The sharp drop in oil prices has taken the shine off the oil & gas sector. Despite this, Reliance Industries (RIL) is in focus again, as refining margins have shot up in the March quarter. The Street expects lower earnings from its shale business to be offset by the sharp uptick in refining margins and the gradual improvement in petrochemical earnings. Though crude oil prices are down, gross refining margins (GRM) have firmed up in 2015. GRM is the difference between the price of crude oil and refined products processed by the refiners.

The benchmark Singapore GRMs have risen sharply on lower utilisation levels in the US and refining outages in other parts of the world. In the March quarter, the benchmark Singapore GRMs improved to $8.7 a barrel from $6.3 a barrel in the December quarter. Analysts claim GRMs are close to a high of $10 a barrel, driven by a considerable uptick in gasoline, naphtha, and fuel oil spreads.

According to IDBI Capital, benchmark refinery margin averaged at $8.05 a barrel in the fourth quarter of FY15, compared to $6.2 a barrel last year. This is likely to benefit all the refineries, primarily RIL. The brokerage has done a sensitivity analysis of RIL’s earnings with respect to increase in GRMs. With every $1 increase in GRM, RIL’s operating income increases Rs 3,400 crore and post-tax profit by Rs 2,700 crore. Analysts expect higher GRMs to support RIL’s earnings in FY16, too. Antique Stock Broking believes higher GRMs in the fourth quarter of FY16 can easily add Rs 1,500-1,600 crore to RIL's refining earnings.

It isn't only rising GRMs that are expected to propel RIL's earnings in the March quarter. Petrochemical margins, too, have remained stable during the quarter, while volumes might rise. The company's first phase of PTA (purified terephthalic acid) and PET (polyethylene terephthalate) capacity expansion at Dahej is over.

Over the past few years, RIL has defined refining and petrochemicals as its core business. The firm has also undertaken lined up capital expenditure of $15 billion, of which $10 billion has been invested. With the construction of the petcoke gasification and refinery off-gas cracker projects at advanced stages, Antique Stock Broking believes it is on track to complete its capacity expansion projects. The company has also commissioned 230 fuel retailing outlets and will open another 850 by mid-2015.

Analysts believe the firm is well-placed to ride the turmoil in oil prices. The stock is currently trading at a price/earnings multiple of 10.8 times (FY16 earnings). The buoyancy in refining and petchem margins, coupled with completion of capacity expansion, analysts expect the stock to fare well in FY16.