RIL: Sept quarter sparkles on refining margins

Falling crude oil prices hit top line but efficient sourcing of oil and cost savings boost margins

Reliance Industries (RIL)'s September quarter profits came way ahead of Street expectations, largely led by strong margins in the refining business that accounts for about 60 per cent of its profits. Despite a 37 per cent year-on-year (y-o-y) fall in standalone net sales to Rs 60,817 crore (which were below expectations of Rs 61,000 crore) due to falling crude oil prices, net profit grew a healthy 14.3 per cent to Rs 6,561 crore.

Input cost savings, lower interest costs and tax rate as well as overall cost efficiencies aided net profit in the quarter. Strong expansion in gross refining margin (GRM) was a key surprise. This metric stood at $10.6 a barrel and is RIL's highest GRM over the past seven years. It stood at $8.3 a barrel in the year-ago quarter. Analysts were expecting GRMs to come in at $8.5-9 a barrel. Lower energy cost and efficient crude sourcing aided margins in the quarter. Higher utilisation, cost rationalisation and better product prices also aided margins of the refining segment; its earnings before interest and taxes (Ebit) margin, thus, expanded around 500 basis points y-o-y to nine per cent. Petchem Ebit margins, too, were up 300 basis points to 11.9 per cent on the back of strong polymer deltas and healthy polyester chain deltas. The two large contributors to RIL's top line and profit also saw margins rise sequentially. Their good show was more than enough to offset pressure in some of the others businesses such as exploration and production (E&P).

E&P business' revenues as well as profitability was impacted by falling production at the KG D6 basin. US shale gas revenues grew five per cent y-o-y in the June 2015 quarter, while the Ebit margin contracted a huge 910 basis points to 30.1 per cent. Falling realisation was the key pressure point for this business in the quarter.

Even as RIL's consolidated revenues fell 33.8 per cent y-o-y as most businesses' top line headed south impacted by oil prices, consolidated net profit increased 12.5 per cent to Rs 6,720 crore. Consolidated net profit excluding exceptional gains stood at about Rs 6,500 crore and was way ahead of estimates of Rs 5,926 crore.

The scrip inched up a per cent on Friday to Rs 912 and could rise further on Monday to factor in the earnings beat in the quarter given that results came after market hours on Friday.

While most analysts are positive on RIL's oil & gas business, they remain apprehensive on excessive cash burn in diversified businesses such as telecom. While the start of new capacities under implementation will help boost core earnings and sentiments, improving production at the KG D6 basin could also act as a catalyst going forward.