Reliance Industries: Cautious optimism

Though the results were broadly in line with expectations, the ramp-up in gas production is key to future growth.

Reliance Industries (RIL) reported strong performance for the September quarter, led by improved margins on turning crude oil into fuel and higher output from its Krishna-Godavari gas fields on the eastern coast of the country. The net profit of Rs 4,923 crore was the highest since December 2007.

Gross refining margins (GRMs) stood at $7.9 a barrel, as against $6 per barrel during the corresponding quarter of the previous year. The company reported the best-ever throughput of 16.9 million tonnes (mt) and utilisation levels of 109 per cent. Net revenues of Rs 57,479 crore were 22.7 per cent higher year-on-year (y-o-y), but declined 1.3 per cent sequentially. Higher volumes drove the petrochemical segment’s revenues 8.6 per cent sequentially to Rs 15,096 crore. However, earnings before interest and tax (Ebit) margins fell to 14.6 per cent as against 16.5 per cent in the corresponding period a year ago.

 

Though polymer margins were lower sequentially, overall petrochemical margins were higher, led by higher polyester margins (highest in the past seven quarters). Given the capacities coming up in China and West Asia, the segment is likely to feel margin pressure, reckon analysts.

With the KG-D6 ramp-up to 80 mmscmd by the second half of 2011-12 still uncertain, GRMs remain the biggest variable to RIL’s earnings going ahead. With refining earnings already expected to be weak during the third quarter of the current financial year, mainly on the back of the month-long shutdown of 20 per cent capacity, analysts at Elara Capital don’t expect any surprise in the coming two quarters.

Edelweiss Securities expects RIL’s 2011-12 GRM around $10.5 a barrel, as compared to the earlier estimate to $11. In the US and Europe, refiners have already adjusted their throughput to maintain margins, while Asia may see overcapacities in the coming quarters. Exploration and production earnings are likely to be flat over the next two-three quarters. However, higher production from Panna-Mukta fields may boost revenues from the oil and gas segment and offset some of the negatives. The stock, at Rs 1,074.35, trades at 12.5x2011-12 earnings.