RIL's refining business shines; focus now on Jio

Mega expansions will provide additional trigger for the stock

A robust performance by its refining segment, which accounts for almost two-thirds of Reliance Industries (RIL)’s gross revenue, helped the company clock its sixth consecutive quarter of net profit growth, in contrast to general Street anticipation of a profit decline.

The gross refining margins (GRM) of $11.5 a barrel, as seen in the December’ 2015 quarter, are at the highest levels seen by RIL in over seven years. GRM is the profit earned by processing a barrel of crude oil (total value of output minus cost crude oil). Looking at the decline in the benchmark Singapore GRM from $7.7 in previous quarter to $5.5 in the June quarter, the Street was pegging RIL’s GRM at $9.5-9.8 a barrel.

While the stronger GRM can be partly attributed to inventory gains led by higher crude oil prices, better inventory and product management, RIL’s agreement with countries in West Asia for procuring crude oil at discount also helped. Higher GRMs along with improved middle distillate cracks (spreads) and advantaged crude sourcing, boosted refining business’ performance.

Consequently, consolidated net profit at Rs 7,113 crore grew a strong 18.1 per cent year-on-year for the June  quarter, and came about 10 per cent ahead of the Bloomberg consensus estimate of Rs 6,490 crore. Ebitda at Rs 13,601 crore, too, came ahead of estimates of Rs 10,869 crore, partly aided by an Rs 790 crore increase in other income to Rs 2,378 crore. Excluding other income, operating profit was up a good 13 per cent.

The petchem segment (forms 24 per cent of gross revenues) too reported a 20.5 per cent year-on-year growth in earnings before interest and tax (Ebit), though in line with expectations of analysts like Nitin Tiwari of Antique Stock Broking. Its performance is expected to improve going forward on better margin in polyester segment and increased capacities.

It is the expansions that will provide additional trigger for the stock, says Tiwari. RIL has incurred huge capex for expanding its core business of refining and petrochemicals, which will accrue benefits in the medium term. The launch of Reliance Jio, which is expected in two months, is another event the Street will be looking at closely.

RIL’s new refining/petchem projects are likely to add to earnings from end-FY18, but telecom business could be a drag on profitability and lead to sub-13 per cent return on equity, Motilal Oswal Securities had said recently. Smaller segments like exploration and production continued to report loss on lower oil and gas prices, and proved a drag on overall performance. The retail segment’s Ebit margins, too, were slightly lower at 2.2 per cent (2.3 per cent in previous quarter and 2.5 per cent in the year-ago quarter).

While the results came post market hours, the stock closed 0.6 per cent higher at Rs 1,012.55 on Friday, ahead of results. Given good core business performance, expect positive reaction on Monday.