Mumbai: Is the Mukesh Ambani-led Reliance Industries Ltd (RIL) at an “inflection point”?
Analysts Jal Irani and Amit Mishra of Macquarie Capital Securities (India) Pvt. Ltd would like to think so.
In a 5 March note to clients, the analysts predict an increase of 39-62% in RIL’s net profit in the January-March quarter of 2010 over the preceding one, an increase that translates into Rs1,500-2,500 crore.
The analysts attribute this increase to higher refining margins, increasing gas production and lower input costs.
“During April-December 2009, RIL has doubled refining capacity and added one of the world’s largest gas facilities, and yet earnings have stagnated due to more than halving in GRMs (gross refining margins),” Irani and Mishra write. “We believe a recent tripling in GRMs, further gas ramp-up and shift to cheap in-house gas shall herald Q4FY10 as an inflection point.”
In a move that confirms the analyst’s theory, RIL paid Rs770 crore as advance tax in the fourth quarter, more than twice what it did in the year-ago quarter (Rs365 crore).
RIL started gas production in the D6 block of the Krishna-Godavari (KG) basin, off the eastern coast, in April. A little before that, it commissioned a refinery in Jamnagar in Gujarat that can process 580,000 barrels of crude oil a day. The company already has an older, 660,000 barrels a day refinery in the same location and the twin facilities—the largest in the world in a single location—can process the dirtiest of crude into high-quality fuels.
There are some analysts who subscribe to the Macquarie theory.
GRMs, or the earnings from cracking crude into fuels, for RIL could be a big trigger for earnings growth this quarter.
“When you have such huge refining capacities, even a $1-2 (Rs45.60-91.20) increase (in GRMs) could add a lot to its bottom line,” said a Mumbai-based sector analyst with a foreign brokerage, who is predicting $8-8.50 a barrel margin for RIL.
“Higher oil prices too will benefit RIL in posting a higher premium over Singapore GRMs,” added this person, who did not want to be identified.
RIL has traditionally posted a premium over the Asian benchmark for refining margins, called the Singapore GRM, but in the past two years, its lead had been slipping. The premium declined from a high of $8.50 a barrel in the January-March quarter of 2008 to $2.70 in July-September of 2009. It has begun recovering from the last quarter onwards and will likely build on its lead again this quarter.
Singapore GRMs have tripled to $6 a barrel from near 10-year lows of $1.70 per barrel during October-December 2009—an increase that Macquarie calls “sustainable” and “significant”.
In the past 18 months, firms have shut down refineries with a capacity to process nearly one million barrels of oil a day and “during 2010 capacity closures is forecast to exceed additions”, which augurs well for margins that were reeling under the effects of demand destruction, write Irani and Mishra. Such “purging of the system by permanent closures” is beneficial especially for more efficient, complex refiners such as RIL, they add.
RIL’s production of gas is expected to increase to 60 million cu. m a day (mcmd) from 45 mcmd and using this gas as a feedstock in its refineries—instead of the pricier imported liquefied natural gas—should cut costs and?push?profits even more.
India Infoline Ltd analyst Prayesh Jain said that even if Singapore GRMs dip sometime later, RIL’s would not.
Crude prices have been swinging wildly in the past couple of years—dipping from an all-time high of $147 a barrel in July 2008 to $30 levels by December of the same year and are now rising again as economies globally rebound. Crude closed at $80.32 a barrel on Friday.
There are also analysts who do not place much significance on the “inflection point” theory.
One of them, who works for a foreign brokerage in Mumbai and did not want to be identified, said the “court case” would be the inflection point.
There is a definite overhang on RIL from a legal wrangle on sharing of KG basin gas with Reliance Natural Resources Ltd, owned by Mukesh Ambani’s estranged younger brother Anil Ambani, who wants the gas at a 44% cheaper price than that mandated by the government, citing a 2005 family pact. The country’s apex court is to deliver a verdict on the dispute soon.