RIL: Tale of trailing GRMs

Analysts cut earnings estimate for FY12, FY13 as petrochem margins, GRMs disappoint.

Shares of Reliance Industries may be available for a song, but it’s still not a conviction buy. Given that the current valuations discount the exploration and production business, the first quarter results should have cheered the market, but this has not happened.

The company managed to meet market expectations but its gross refining margins (GRMs) continue to disappoint the Street. At the end of the fourth quarter last year, the company had justified the lower premium over the Singapore GRMs by citing closure of the refinery. According to Nomura, RIL’s premiums over Singapore margins at $1.7 continue to shrink (down 53 per cent YoY and six per cent QoQ). In FY08, RIL's GRMs for the full year stood at $15, the highest.

Typically, the company enjoys a $3 premium to Singapore GRMs ($8.7), however, but Q1 GRMs have come in lower at $10.3 per barrel. With government rationing gas from D6 on a priority basis to a select few, RIL is using expensive LNG as feedstock for its refinery, which has pushed up costs and eaten into margins. This explains GRMs at $10.3 (up 44 per cent annually and 12 per cent sequentially).

Lower GRMs have been offset by high throughput, which touched a record of 17 million tonnes (mt), bringing overall segmental profitability in line with expectations. Refining contributed 46 per cent of overall Ebit for the quarter, compared to 34 per cent in Q1FY11. Analysts say refining margins are also under pressure due to higher crude costs, thanks to higher linkage to Brent and higher fuel oil cracks (which boost Singapore GRMs).

The petchem performance was also weaker than expected in Q1, with domestic demand being impacted by destocking by end users due to price volatility.

According to Citi, besides weaker spreads, demand for polymers (-4 per cent) and polyesters (-5 per cent) was also down year-on-year, though RIL managed to increase overall volumes on the back of a shift toward export markets.

One domestic brokerage has reduced its FY12 and FY13 earnings estimates by 2.4 per cent and 11 per cent, respectively, after marginally trimming GRMs and petchem margin estimates.

Apart from business risks emanating from a global economic slowdown, analysts are worried about the deployment of surplus cash, unrelated diversifications and lack of any guidance on KG-D6.