BackRIL seen posting marginal rise in standalone Sep quarter profit
Refining business to be hurt by lower product prices, inventory loss and forex movements, according to analysts
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Reliance Industries Ltd (RIL) is likely to report a small increase in its quarterly profit as the impact of low crude oil prices will be partially offset by higher petrochemicals margins.
A Bloomberg poll of 12 analysts has estimated the company to post a standalone net profit of ₹ 5,878 crore and revenue of ₹ 61,655 crore for the three months ended 30 September. The company posted a standalone net profit of ₹ 5,742 crore and revenue of ₹ 96,486 crore in the same quarter a year ago. RIL was scheduled to announce its earnings on Friday.
The company started reporting consolidated earnings from the first quarter of the last fiscal year, but most analysts still report their earnings estimates on a standalone basis.
Its refining operations, which account for 66% of overall profit and 70% of the overall revenue, is expected to be hurt by lower product prices, inventory loss and adverse foreign exchange movements, reflecting the impact of a sharp fall in crude oil prices. The margins in the refining business—called gross refining margin (GRM), or profits earned on processing each barrel of crude oil—is estimated to be at $9 per barrel for the quarter. While this is an 8.4% rise from a year earlier, it is 13% lower than the preceding June quarter, wrote several analysts in their reports.
“We forecast Reliance Industries (RIL) to report subdued Q2FY16, with a 7% QoQ (quarter-on-quarter) fall in PAT (profit after tax) to INR59bn ( ₹ 5,900 crore standalone)... refining margins will decline (we expect USD9/bbl) tracking the 23% QoQ fall in Singapore benchmark (GRM benchmark) and expected inventory losses amidst 20% fall in oil price," said an 8 October report by brokerage Edelweiss Securities Ltd.
The silver lining for the company’s refining business is its zero exposure to the fuel oil (a major refining product) segment, which has seen very low prices. This has kept Reliance’s GRMs relatively higher against the average GRMs of major Asian refiners, referred as the benchmark Singapore GRM.
“Asian refining benchmarks were down US$2-2.5/bbl QoQ in the Sep quarter. However, a large proportion of this decline was driven by over a US$4/bbl QoQ fall in fuel oil spread, which should benefit Reliance. Its complex refinery does not produce fuel oil," wrote analysts at CLSA Ltd in a 1 October note.
Another aspect that favoured the company is improved petrochemical margins. The chemicals business account for 30% of its overall revenue and profit.
RIL is seeking to increase its petrochemical capacity by 66% by the end of March 2017, on expectations of an increase in demand from India and other emerging markets.
The company has already invested up to ₹ 90,000 crore in the business to position itself among the top five producers in the world across its portfolio of 20-odd products in the polyester and polymer segment.
“Petrochemical EBITDA margin (18% in Q2FY16 versus 16% in Q1FY15 and 12% in Q2FY15) will likely be supported by strong polyester and polymer spreads," said the Edelweiss note cited earlier.
Ebitda is earnings before interest, tax, depreciation and amortization—it indicates a company’s operating profit.
However, RIL’s exploration and production (E&P) business will continue to be a drag on the company’s books as both domestic oil and gas production and US shale oil and gas are expected to be affected by lower prices and lower production.
“We expect KG D6 gas production to remain flat QoQ but down 8% YoY (year-on-year) at 11.5 mmscmd," the Edelweiss report added.
The company’s shale oil and gas operations in the US slipped into losses for the first time since its investments in three shale blocks in 2010. Analysts expect the trend to continue in the current quarter.
However, most analysts are expecting to hear more on RIL’s telecom venture before the proposed December launch of its fourth generation (4G) telecom service.
RIL’ s shares rose by 0.22% on Thursday to close at ₹ 904, while the benchmark BSE Sensex gained 0.86% to close at 27,010.14 points. In the quarter ended 30 September, RIL’s shares fell nearly 14.5% to ₹ 860.
“Reliance’s share price has corrected 11% since June (Sensex: -4%), underperforming most of its downstream Asian peers on concerns about weaker margins and lower oil prices. Yet, margins remain resilient while Reliance has also been able to navigate macro volatility better in the past. We expect just a 5% q/q fall in its standalone EPS (earnings per share) in 2QFY16, likely outperforming most Asian downstream peers," said Barclays Research in a 6 October note.
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