RIL seen posting increased Q1 profit led by better petrochem margins

RIL likely to post standalone net profit of Rs6,444.7 cr, revenue of Rs58,141.2 cr for the quarter, say analysts

Refining and marketing, core of RIL’s operations, could see a drop in performance because of lower refining margins. Photo: Reuters
Refining and marketing, core of RIL’s operations, could see a drop in performance because of lower refining margins. Photo: Reuters

Reliance Industries Ltd (RIL) is likely to report an increase in its quarterly profit, led by stronger petrochemical margins which will help offset weaker earnings from its refining business.

A Bloomberg poll of 10 analysts estimates the company will post a standalone net profit of Rs.6,444.7 crore and revenue of Rs.58,141.2 crore for quarter ended 30 June. The company posted a standalone net profit of Rs.6,318 crore and revenue of Rs.71,412 crore in the year earlier quarter. Analysts, however, expect RIL to report a drop in profit from the preceding three months.

“A breather after five solid quarters—we expect standalone profit after tax at Rs.6,200 crore (-15% quarter on quarter). This would be the first sequential drop after five quarters of consistently improving operating performance, attributable almost entirely to refining,” said Citi Research in a report dated 4 July.

Though RIL has been reporting consolidated earnings since July 2014, many analysts still assess earnings on a standalone basis. Two analysts polled by Bloomberg expect consolidated revenue of Rs.67,760 crore and a net profit of Rs.6,510 core. The company posted consolidated net profit of Rs.6,222 crore and revenue of Rs.83,064 crore a year ago.

“After five consecutive quarters of earnings increases, we expect RIL’s earnings to moderate in 1QFY17, driven mainly by weaker refining segment earnings,” said Nomura Research in its report dated 7 July, adding that it expects the reported standalone profit after tax of Rs.6,510 crore, a 11% decline from the preceding April quarter but up 3% from a year earlier.

Refining and marketing, the core of RIL’s operations, could see a drop in performance because of lower refining margins. Refining and marketing account for nearly 78% of RIL’s overall revenue and over 60% of profit.

Analysts expect RIL to post a gross refining margin (GRM) between $9.5-10 per barrel, against $10.4 per barrel a year ago and $10.8 per barrel in the March 2016 quarter. GRM is realization from turning every barrel of crude oil into finished products.

“GRMs are expected to stand sequentially lower at $9.5 per barrel on weaker light distillates, partially offset by stable middle distillates and lower fuel (LNG) costs,” said Antique Stock Broking Ltd in its report dated 8 July. The profitability in the refining segment will be further impacted by lower throughput on account of maintenance shutdown during the quarter, the report added.

Brent crude oil prices averaged higher at $47 per barrel during the quarter against $35 per barrel in the fourth quarter of last fiscal. The Singapore benchmark gross refining margin averaged at $5 per barrel during the June ended quarter as against $ 7.7 per barrel during the fourth quarter.

The weakness in GRMs resulted from weaker light distillate spreads while middle distillates improved marginally. Petroleum products are usually grouped into four categories—light distillates (LPG, gasoline and naphtha), middle distillates (kerosene, jet fuel and diesel); heavy distillates and residuum (heavy fuel oil, lubricating oils, wax, asphalt).

“RIL is likely to increase its premium over benchmark refining margin in our view as the benchmark suffered due to lower furnace oil and LPG margins, two products that RIL does not produce,” said HSBC in its report dated 7 July. RIL’s refineries on an average enjoy a premium of $2-3 per barrel to Singapore GRMs. Earnings from the petrochemicals segment are expected to rise on higher volumes and margins.

“Petchem earnings will rise 10% q-o-q (quarter-on-quarter) on higher volumes and 35% rise in polypropylene margins. Petchem EBIT up 10% QoQ on strong polypropylene margins and higher volumes,” said Edelweiss in its report dated 5 July.

Ebit stands for earnings before interest and taxes and is an indication of a company’s profitability.

On the exploration and production (E&P) front, which includes domestic assets and US shale gas assets, the first quarter could be a loss-making one for RIL as crude oil and domestic gas prices are lower compared to last year. Production from the KG block is also expected to be lower.

“E&P losses should deepen due to a lower domestic gas price. Domestic production from both the KG-D6 and PMT (Panna-Mukta-Tapti) blocks will likely decline further. KG-D6 will also be impacted by a nearly 20% domestic gas price cut from 1 April 2016, though marginally offset by higher oil prices,” said Citi Research.

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