RIL: Not the best of times

Lower than expected refining margins have dragged down the company's profits.

With gross refining margins (GRMs) coming in at $7.5 per barrel rather than the $8-8.5 per barrel that analysts had pencilled in, Reliance Industries’ (RIL) June 2009 quarter profit numbers turned out to be somewhat disappointing. The ebit (earnings before interest and tax) margin for the refining business, at just 4.4 per cent, showed a steep drop over the 9.4 per cent reported for the June 2008 quarter.

Analysts point out that spreads for end products have narrowed over the past few months and, therefore, RIL too would have lost out. Typically, RIL’s GRMs have been significantly better than those for refiners in the region, which have averaged around $4.5 per barrel in recent months.

The reason RIL usually posts much better GRMs than those of its peers is its more complex refinery, which can process cheaper and heavier crude oil. The top line number, at Rs 32,056 crore, slipped 23 per cent, year-on-year and was more or less in line with what the Street had been expecting. However, though the effective tax rate was expected to be higher following the upward revision of the minimum alternate tax in the Union Budget, the bottom line came in somewhat lower than the consensus estimates.

In fact, with raw material costs lower, the total expenditure came down by about 26 per cent, as a result of which the ebitda (earnings before interest, tax and depreciation) margin was up nearly 400 basis points, limiting the drop in the operating profit. However, the ebit margin rose just 110 basis points to 13.4 per cent, thanks to the much higher depreciation provided at Rs 1,628 crore.

Analysts believe the performance should improve from here on after the Reliance Petroleum merger is completed and production from the KG-D6 basin is stepped up. However they believe that only a cyclical recovery in the petrochemicals and refining businesses can help sustain the growth momentum.

The Street is also concerned about the court battle between the company and RNRL over the price at which gas should be supplied to the latter from the KG basin. At the current price of Rs 2013, the stock trades at just under 18 times estimated 2009-10 earnings and at a premium to many of its peers.