Reliance Industries: In an uncertain zone

Results were in line with expectations due to higher volumes in the refining segment and steady margins.

The quarterly results of Reliance Industries were in line with estimates; however, certain concerns and uncertainties boggled analysts. Revenue at Rs 58,200, though 86 per cent higher than that reported in the June quarter of the previous year, was just a percentage point up over the March 2010 quarter. Operating profit margins, at around 16 per cent, were maintained at sequential levels.

Things could have been worse had the refining division not posted strong volume growth. The segment worked at a 107 per cent capacity utilisation (blended), while the global capacity utilisation rates are around 90 per cent. Also, gross refining margins (GRMs), which were a tad lower than expectations at around $7.3 per barrel, were much better than those in the international market. GRMs enjoyed a premium of around 3.6 per cent in the June quarter, as against a three per cent premium in the March quarter, due to the company’s savvy product mix. The Singapore complex GRMs dropped roughly 25 per cent during the month of May and June. In addition, there was a 41 per cent year-on-year increase in production.

 

However, concerns persisted over the petrochemical business. The segment saw tough times, as production and price declines had an impact on margins. Going ahead, improvement in the price scenario in the petrochemical business will be critical, as the segment accounts for only 20 per cent of revenues, but it contributes around 35 per cent to earnings before interest and tax (Ebit). The outlook for the segment does not look very optimistic, as only 32 milion tonnes of ethylene capacity addition have been planned for the 2010-2013 period, which is roughly 20 per cent of the existing capacity, point analysts. Importantly, more than 90 per cent of this would be in West Asia and China.

The management has mentioned it was not sure if the gas capacity would be ramped up to 80 mmscmd from the 60 mmscmd levels. If the current levels are maintained, there could be a downward earnings rerating. However, clarity on the telecom and shale gas businesses could be positives.