Refining saves the day, but watch out for the elephant in the room - Livemint

Supported by higher margins, the refining segment posted its highest ever quarterly consolidated Ebit of Rs.4,902 crore for the March quarter. Photo: AFP

The new fiscal year has started on an upbeat note for Reliance Industries Ltd (RIL ), with its stock rising as much as 12% compared with a mere 1.7% rise in the benchmark Sensex. The reasons for this optimism are well known.

The biggest of them is that Singapore gross refining margins (GRMs) were strong in the March quarter at $8.5 a barrel, an increase from $6.3 per barrel in the December quarter. GRMs got a boost on account of refinery outages and a sharper decline in crude oil prices than that of refined products. The strong numbers from the company’s refinery division in its quarterly results were thus widely expected.

RIL met those expectations comfortably. The company earned a refining margin of $10.1 per barrel in the March quarter, much higher than the $7.3 a barrel in the December quarter. Lower fuel costs and firm gasoline, gasoil and naphtha cracks boosted its March quarter GRM, said the company. Supported by higher margins, the refining segment posted its highest ever quarterly consolidated Ebit (earnings before interest and tax) of Rs.4,902 crore for the March quarter. This is despite the fact that refining revenues declined on account of much lower crude oil prices.

The petrochemicals business’s Ebit and revenue declined in the March quarter on a year-on-year basis, but Ebit margins improved. Margins were aided by polymer and polyester prices not falling as much as input costs did.

RIL felt the heat of falling crude oil prices in its US shale gas business. Domestic oil and gas revenues were also adversely affected by lower production.

Clearly, the refining business, as in many past quarters, compensated for the lacklustre performance of the petrochemicals and the oil and gas segments. RIL’s overall performance was also helped by a decline in finance costs.

The upshot: stand-alone net profit for the March quarter came in at Rs.19.3 per share, 61 paise higher than a Bloomberg poll of 10 analysts. Consolidated net profit for the March quarter came in at Rs.6,381 crore, 8.5% higher than the same period last year.

Will the results drive the stock up further? The scrip has already factored in the results, according to Dhaval Joshi of Emkay Global Financial Services Ltd . “We think the result play rally is overdone,” Joshi said in a note after the results and before the analysts’ meeting.

Will the stellar performance of the refining business continue? That could be the dark cloud on the horizon. According to Religare Institutional Research, high GRMs seen in February and March are likely to moderate going forward as winter demand eases and refinery runs improve from newly commissioned units in West Asia and also from US refineries where the maintenance season ends in March.

In fact, “telltale signs of this are already visible as GRMs for April 1-15 have corrected to about $7.1 a barrel”, Religare said in a note on 17 April. Demand is expected to be soft for the petrochemicals business and the problems with the outlook on the oil and gas business are well known, given production concerns and pressure on realizations.

As for the company’s organized retail business, it grew substantially on a year-on-year basis, but how much can it move the needle, considering its relatively small size in the overall scheme of things? Also, organized business Ebit has declined sequentially.

Moreover, as Motilal Oswal Securities Ltd pointed out in its results preview, RIL’s new refining and petrochem projects are likely to add to earnings from 2016-17, but the telecom business will be a drag on profitability, leading to sub-13% return on equity. Its pre-launch capex could be revised up from around Rs.78,000 crore to about Rs.90,000 crore, based on the recently concluded spectrum auction, Citi Research said in its preview. Investors would be keenly watching the progress and news flow on the telecom business, which may turn out to be the elephant in the room.

The writer does not have positions in the company mentioned above.

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