Reliance Industries: Refining blues

The Reliance Industries stock closed Thursday’s trading session at Rs 1997.60. This is just the fourth time in the last year that has the stock closed below the Rs 2,000 mark. The Street is concerned that gross refining margins (GRMs) for India’s second –largest refiner could be weaker than expected in the coming quarters.

In the June 2008 quarter, RIL posted GRMs of $15.7 per barrel, which disappointed the Street which had pencilled in margins of $16-17 per barrel, given the sharp rise in crude oil prices. Refining contributes about 55 per cent to the company’s revenues which were Rs 1.37 lakh crore in FY08. Moreover, industry watchers believe there could be a slight delay in the output of gas from KG-D6 basin with it now being available only in November or even later.

 

Analysts say less than robust demand and fresh refining capacity coming into the market---much of it in Asia and the middle east-- over the next couple of years, could cause refining margins to fall 20-25 per cent from FY 2008 levels.

Over one million barrels per day (bpd) of crude oil distillation capacity is estimated to come on stream in CY08 while twice that capacity is expected to be commissioned in the following year. GRMs, which were ruling at roughly $15 per barrel in FY08 could, therefore, come off to levels of around $12 per barrel by FY10.

Towards the end of August, Singapore refining margins had dropped sharply the result of a fall in the margins for diesel.

With the new refineries being complex in nature, the demand for middle distillates such as diesel and kerosene is likely to be met. However, margins for diesel could nonetheless remain higher than those for gasoline.

RIL’s petrochemicals business which brings just over 40 per cent of revenues is expected to do well with petrochemicals margins firming up in recent weeks. Also, the risks of the company being asked to pay a windfall tax appear to have receded.

RIL is expected to end FY09 with revenues of around Rs 1.9 lakh crore and a net profit of close to Rs19,000 crore.