Reliance Industries Ltd’s (RIL) fourth quarter (Q4) results disappointed on many counts. Net profit for the three months ended 31 March grew 14.1% over a year ago, missing Street consensus estimates. This is all the more disappointing since the business environment in some operating segments was favourable during the quarter.
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Revenue in Q4 grew 26.2% from a year ago. However, the growth has mostly come from higher prices rather than an increase in volumes. The more worrying statistic for investors is that Ebit (earnings before interest and tax) margins fell in two of its three main operating segments. In the refining segment, which accounts for 73.6% of its revenue, Ebit margins fell 60 basis points from a quarter ago to 4%. One basis point is one-hundredth of a percentage point.
That flies in the face of improving operating environment. Higher demand for heating oil and the shutdown of refineries in Japan after the earthquake there boosted global gross refining margins (GRMs). Not only that, light-heavy crude differentials increased. RIL has a complex refinery that can process heavier variety of crude better. That grade is typically cheaper and RIL benefits when the differential increases.
Ergo, the improvement in GRMs from a quarter ago should have been more than the 20 cents (Rs 8.86) reported by RIL. The company said its GRMs came in at $9.2 per barrel for Q4. That is about $2 per barrel more than Singapore GRMs and is the lowest premium in at least nine quarters. One reason for this could be because of higher margins for fuel oil, which is not produced by RIL.
The company has attributed the fall in Ebit margins to a refining shutdown. However, it must be pointed out that the segment boasts a utilization rate of 108% for Q4, higher than the Q3 utilization rate of 104%.
Now consider the petrochemical business. In this segment, Ebit margins fell even more sharply by 80 basis points from a quarter ago to 14.4%. Sure, polymer margins were expected to decline marginally because of subdued demand due to higher prices. However, polyester and its intermediate product margins were expected to go up because of higher cotton prices globally.
Notably, before the results were declared, these two segments—refining and petrochemicals—were supposed to offset the lower or flat natural gas production. Surprisingly, the oil and gas business reported better margins sequentially.
One question that continues to plague investors is: what is the future of this business? The Street has lofty expectations of the exploration and production (E&P) business, especially after RIL signed an agreement to sell 30% of its blocks to BP Plcearlier this year. But nothing much has been forthcoming from the company after it warned the regulator last month that gas output from the KG D6 block may drop this fiscal. On Wednesday, the Directorate General of Hydrocarbons told Reuters that the block was pumping 53 million standard cubic metres per day (mscmd) in March, less than the 60 mscmd it produced last year and it has apparently not given a reason for the lower output. Notice that revenue from the E&P business has fallen compared with the previous quarter despite higher crude prices.
RIL has not provided further clarity about what it intends to do with Rs 42,393 crore of cash on its books. Sure, it has announced partnerships with financial services firm DE Shaw and Co. Lp and talked about rolling out next-generation telecom services. But investors are waiting for more news on that.
The stock has underperformed the benchmark index for most of the past fiscal before the BP deal and expectations of higher refining margins boosted the price. However, further upside will depend on how RIL addresses these questions and not just one-off gas discoveries made public half-an-hour after the results announcement.
Graphics by Yogesh Kumar/Mint
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