Mumbai: The greater contribution of operating profit from core businesses and a substantial quarter-on-quarter (q-o-q) rise in net profit overshadowed the 5.7% year-on-year (y-o-y) dip in Reliance Industries Ltd’s (RIL’s) profit for the quarter ended 30 September.
The oil-to-yarn and retail conglomerate reported a Rs.5,376 crore net profit for the quarter ended 30 September, a 20.2% improvement sequentially. RIL achieved this growth due to its refining business performing better over the earlier quarter.
Even the percentage drop in net profit over the year ago was much lower when compared with previous quarters.
In the past five quarters, including the April-June period, RIL’s quarterly net profit saw a y-o-y decline of 16-21%.
The company reported a revenue of Rs.93,265 crore for the quarter, up 15.4% over the year ago, but 1.7% lower than in the April-June quarter.
The Mukesh Ambani-led conglomerate’s earnings for the second quarter of fiscal 2013, announced after market hours on Monday, were broadly in line with Street estimates.
A consensus of RIL’s earnings estimates by various brokerage firms compiled by Bloomberg pegged the company’s net profit at Rs.5,239 crore and revenue at Rs.95,129 crore.
“RIL’s business and financial performance for the first half of FY2012-13 has been satisfactory despite weakness in global economies and the resultant margin environment,” RIL chairman Ambani said in a statement. “Despite current weakness...we continue to invest in our long-term growth projects to deliver sustainable value to all our stakeholders.”
RIL’s refining business was the star performer among the company’s three segments (the other two being oil and gas exploration and production, and petrochemicals), responsible for the strong q-o-q growth in net profit. Operating income from the business grew 65% sequentially to Rs.3,544 crore, despite a 1.7% drop in revenue to Rs.83,878 crore.
Operating profit and revenue from refining were up 15.2% and 23.1%, respectively, over the year ago.
“The past three months have been strong as refinery outages, particularly in Japan, China and Taiwan, led to tight markets and hence stronger cracks (margins),” the RIL statement said.
On a trailing quarter basis, robust demand for petrol and diesel from India, China, Japan, Vietnam and Malaysia supported margins for the petroleum products, it said.
The gross refining margin (GRM), or difference between the cost of processing crude and the revenue earned from sale of finished products, was higher at $9.5 per barrel, versus $7.9 in the earlier quarter, in line with estimates.
“Refining profits are starting to stabilize and that’s the silver lining for Reliance,” Deven Choksey, managing director at KR Choksey Shares and Securities Pvt. Ltd in Mumbai, said before the earnings were announced. “I expect earnings to improve further the rest of the year as refining margins expand.”
After being critical over the last four-five quarters, RIL observers such as Mumbai-based independent stock market analyst S.P. Tulsian and Jagannadham Thunuguntla, head of research at SMC Global Securities Ltd, lauded the company’s performance in the September quarter.
Tulsian pointed out that overall profit before tax was up by nearly the same amount as operating profit from the refining vertical, signalling that the core business was driving profit growth.
“This has led to the importance of other income in company’s overall profitability coming down,” Tulsian said.
He expects RIL’s stock price to trade at Rs.830-910 per share over the next one year from a range of Rs.780-860 earlier.
“Even though net profit has somewhat slid over the year before, the quality of RIL’s earnings this time has been much better,” Thunuguntla said. “In the future, markets and analysts will ascribe greater value to the quality of RIL’s results rather than the quantity.”
RIL’s share price rose 0.53% on BSE on Monday to close at Rs.823.20 per share. The benchmark Sensex rose 0.21%. The earnings were announced after markets closed.
In the July-September quarter, RIL’s shares gained 13.46% while the Sensex rose 7.65%.
RIL’s petrochemicals business, which has been weak over the last few quarters, didn’t let overall numbers down too much on a sequential basis. Operating profit from the business fell 0.9% q-o-q to Rs.1,740 crore and revenue increased 1% to Rs.22,058 crore in the same period.
The company said the petrochemicals business was going through a cyclical low due to the slowdown in China. It expects growth in the business to be back up in the first quarter of calendar year 2013, after China’s political transition is complete by November.
“If the petrochemicals business grows from here on, imagine the traction RIL’s earnings will get from its core businesses,” Tulsian said.
The conglomerate’s exploration and production (E&P) business continued to remain weak, with operating profit falling to Rs.866 crore, down 11% q-o-q and 43.4% y-o-y. Revenue from the business was down 10.1% q-o-q and 36.7% y-o-y to Rs.2,254 crore.
The weakness, as in previous quarters, was a result of falling gas output from the D6 gas reservoir in the Krishna-Godavari basin.
While RIL and its partner, London-based BP Plc, are still looking for a solution to arrest the decline in gas supply, the company’s statement on Monday sent out a positive signal that the revised field development plan for the D1 and D3 blocks in the D6 field estimates production from the asset to extend into the next decade.
The company also reiterated its stance on the pricing of natural gas in the country through its statement, which said that the gap between demand and supply of the fuel was expected to remain high in India, and that selling gas at an “arm’s length” or market-determined price was a key tenet of the production-sharing contract signed with the government.
RIL is looking at a number of plans, including augmenting capacity and improving efficiency at its Jamnagar refining complex as initiatives towards meeting Ambani’s target of doubling revenue, Tony Fountain, chief executive for refining and marketing, told reporters in New Delhi. “We are looking at options for both the DTA (domestic tariff area) and SEZ (special economic zone) refineries,” Fountain said.
Utpal Bhaskar in New Delhi and Bloomberg contributed to this story.