Mumbai: India’s biggest company by market value,Reliance Industries Ltd (RIL), posted a 9.8% decline in fiscal third quarter (Q3) net profit, its first drop in 11 quarters, but still managed to beat analyst estimates. One analyst attributed the better-than-expected performance to higher interest income earned by the company.
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The company, controlled by billionaire Mukesh Ambani, saw its earnings slide largely on reduced demand for oil and gas, lower refining margins on falling crude prices and declining petrochemical sales.
A Mint poll of four brokerage firms had predicted revenue of Rs29,598 crore and a profit after tax of Rs3,003.53 crore for the company in the three months ended 31 December.
Instead, RIL reported a Rs3,501 crore net profit for the quarter, against Rs3,882 crore in the same period in 2007-08. The company reported revenue of Rs31,563 crore, down 8.8% from Rs34,590 crore in the corresponding quarter of the previous year.
Last year’s numbers exclude one-time gains that had accrued to RIL from the sale of Reliance Petroleum Ltd’s shares.
“The results are above our expectations, but much of this deviation is because of a much higher other income that RIL has reported and that has pulled up the profit figure. This component is because of a higher interest earned by the company,” said Deepak Pareek, a sector analyst tracking RIL for Mumbai-based domestic brokerage Angel Broking Ltd.
The brokerage has a “buy” rating on the stock, with a target price of Rs1,440.
RIL’s “other income” jumped more than two-and-a- half times, from Rs241 crore in the December quarter of 2007 to Rs663 crore in the December quarter of 2008, as it earned interest on funds from conversion of promoter warrants that were put into fixed deposits, an RIL spokesperson said.
Ahead of the results, RIL’s shares rose 1.21% to close at Rs1,132.95 each on the Bombay Stock Exchange even as the exchange’s benchmark index, the Sensex, stayed flat. RIL, which at 14.11% has the most weightage on the Sensex, has lost close to 50% of its value since 1 April 2008, while the index has lost 43.66%.
For the nine months ended 31 December 2008, RIL’s revenue increased by 21% over the corresponding period of 2007-08 to Rs1,21,698 crore and net profit without exceptional items rose by 3.4% to Rs11,733 crore.
The firm has continued to adjust the foreign currency exchange differences on money borrowed for acquisition of fixed assets in the carrying cost of these fixed assets instead of charging it to the profit and loss account in accordance with the Accounting Standard, or AS 11. Had the company followed AS 11, its net profit for the nine-month period ended 31 December 2008 would have been lower by Rs1,177 crore.
Under AS 11, a company is required to charge to its profit and loss account the difference that arises out of currency fluctuations.
RIL said in a statement that gross refining margins (GRMs) had been affected “by the volatile margin scenario witnessed by the industry globally”. RIL’s refining margin for the quarter was $10 (Rs489 today) for a barrel of crude, well above the benchmark Singapore complex (refinery) rate of $6.4 a barrel. However, the number was well below the margin of $15.4 a barrel for the same quarter in fiscal 2008.
An analyst with a Mumbai-based foreign brokerage, who did not want to be identified, said he was surprised at such high refining margins even though the company signs forward contracts not just on crude oil, but also on refinery products, which insulate it from a fall in product prices.
“I don’t think the worst is over yet. GRMs could squeeze further as refining capacities are added and demand remains sluggish. Besides the big question of whether and at what price will the gas be sold, it is to be seen how and where RIL places its products coming out of the new Jamnagar refinery,” the analyst added.
Gas production from the Krishna-Godavari basin off the eastern coast of India, expected to start late February, will likely be RIL’s next big money-spinner. However, the company’s ability to sell this gas is dependent on the outcome of a case it is fighting in Mumbai with Reliance Natural Resources Ltd, led by Mukesh’s estranged younger brother Anil Ambani.