RIL: Refining margins weak

Lower than anticipated gross refining margins (GRMs) pulled down the Reliance Industries (RIL)’s refining margins for the September 2009 quarter as a result the company’s earnings fell 6 per cent year-on-year though they rose 5 per cent sequentially.

GRMs for the quarter were at $6 a barrel compared with $6.8 a barrel in the June quarter. However, the petrochemicals business did well posting strong volumes and margins going up 4 per cent sequentially. What disappointed analysts was that the earnings before interest and tax for the exploration and production business, was up only Rs 200 crore sequentially despite an increase in revenues of Rs 1,100 crore and an estimated Rs 900 crore rise in the earnings before interest tax and depreciation (ebitda). Analysts are somewhat surprised at the cash flows for the first half of the year.

CLSA points out that cash flows appear to be lower than anticipated indicating sharply negative net working capital changes and loans and advances. Reliance’s net debt, it points out, has risen Rs 3,100 crore since March 2009, to Rs 51,900 despite 2,000 crore in favourable foreign exchange changes, Rs 2,900 crore from treasury stock sales and cash profits of Rs 12,500 crore against a capital expenditure of Rs 7,800 crore.

The stock has corrected in the last few trading sessions along with the rest of the market. While refining margins may not see a sharp uptick soon, a favourable judgement in the court case between the company and RNRL, on the supply of gas from the KG D-6 basin, would help. The street would of course, prefer some good news on the exploration front.