Mumbai: Reliance Industries Ltd, India’s No.1 company by market value, said on Thursday its profit excluding an asset sale rose 26% in the three months to December as it earned more than global refiners from processing crude into petrol and diesel but its petrochemicals business suffered a drop of 3%. Disappointed investors pushed the stock down by a similar number.
Reliance, headed by Mukesh Ambani, posted a net profit of Rs3,882 crore, excluding money from the sale of a 4.62% stake in subsidiary Reliance Petroleum Ltd in the quarter. Including this, the firm earned a net profit of Rs8,079 crore.
“The numbers are not that good and below expectations. Although the bottom line (net profit) has been lifted by the stake sale in Reliance Petroleum, the core business growth was not up to the mark,” said Vinay Nair, analyst at Khandwala Securities. He added that the company’s margins in its petrochemicals business were under pressure.
However, other analysts said the company’s results were in line with expectations and attributed other reasons to the fall in the company’s stock.
A Reliance Fresh store in New Delhi. Reliance Industries expects good returns from its nascent retail business, although this has faced stormy protests from vendors and shopkeepers in some states
“Reliance earnings are in line with our expectations,” said Niraj Mansingka, an analyst with Edelweiss Capital Ltd in Mumbai. And R.K. Gupta, a fund manager at Credit Capital Asset Management Ltd in New Delhi, added the stock fell as some investors had expected the company to introduce a stock split, converting one share into multiple shares of correspondingly lower value, a process that increases liquidity of the stock and sometimes facilitates more rapid appreciation in share price.
Shares of Reliance closed 3.3% down at Rs2,996.25 each on the Bombay Stock Exchange even as the exchange’s benchmark index, Sensex, fell less than 1% to close at 19,700.82. The stock outperformed the benchmark index in 2007, returning 118% compared with the Sensex’s 39.41%.
Investing in business
Including the proceeds from the stake sale, Reliance’s net profit almost tripled. That will help the company complete the world’s biggest refinery complex, start piping gas from the country’s largest field this year, and aggressively roll out a chain of retail stores selling everything from fresh produce and electronics to shoes and books.
“Cash flows from current businesses have to be rolled into the new business, which involve major capital expenditure,” said Jon Thorn, who manages $250 million in equity at India Capital Fund in London. “We are making newer and newer investments and that is why we monetized our stake in Reliance Petroleum,” Alok Agarwal, chief financial officer at Reliance Industries, said.
Analysts expect Reliance’s profit in 2008-09 to be boosted by sales of natural gas from two deep-sea fields in the Krishna Godavari basin off India’s east coast.
The company aims to produce up to 80 million standard cubic metres of gas per day in the second half of 2008-09, and Agarwal said development of the fields was up to 70% complete.
The company also expects good returns from its nascent retail business, although this has faced stormy protests from vendors and shopkeepers in some states. Agarwal said there were no immediate plans to raise funds through a stock market listing of Reliance Retail, a wholly-owned subsidiary.
Reliance Retail opened 112 Reliance Fresh stores during the quarter, taking the total to 453 stores across India. It launched six new retail formats during the quarter. It also formed an alliance with Apple Inc. to set up a chain of speciality iStore, with the first one being launched in Bangalore during the quarter.
“The new growth platforms around oil and gas, organized retailing and agro-retail initiatives are gathering momentum and the initial response to these initiatives has been very encouraging,” RIL chairman Mukesh Ambani said in a statement.
Higher refining margins
Much of the profit not related to the stake sale came from higher refining margins. The company earned $15.4 from processing each barrel of oil into fuels, compared with $11.7 a year ago, a rise of more than 31% and more than triple the average in the US. The benchmark refining margin for Asia was $7.7 per barrel during the quarter. Higher refining margins are evident in the company’s valuation. RIL trades at 36.56 times earnings, six times more than US refiner Valero Energy Corp. and Tesoro Corp.
Agarwal said Reliance Petroleum’s 580,000 barrel-per-day (bpd) refinery coming up next to Reliance Industries’ 660,000 bpd unit at Jamnagar, Gujarat, was expected to be completed a few months ahead of the December 2008 target. Reliance owns just more than 70% in Reliance Petroleum. Chevron Corp. owns 5%.
Reliance expects the new refinery’s margins to be around $16-17 a barrel.
Valero Energy, the US’ biggest refiner, had its biggest decline since 2001 on 15 January in New York trading after the stock was downgraded by analyst Fadel Gheit of Oppenheimer and Co. Gheit cited expectations that profit margins on refined fuels will narrow as a slowing economy keeps oil processors from charging enough to compensate for high crude costs.
Reliance’s net revenues rose more than 22% to Rs34,590 crore from Rs28,195 crore in the year-ago quarter. For the nine-month period ended December, Reliance’s turnover crossed the trillion (Rs1,00,000 crore) mark.
Hiral Vora is with Reuters and Manash Goswami is with Bloomberg. Bloomberg’s Archana Chaudhary contributed to this story.