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RIL rides on refining profits

RIL rides on refining profits
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First Published: Fri, Apr 27 2007. 12 14 AM IST
Updated: Fri, Apr 27 2007. 12 14 AM IST
The stock of Reliance Industries Limited (RIL) hit a high almost every day in the past weeks in anticipation of quarterly results that most analysts expected to be good. The company hasn’t disappointed, posting results that are actually well above analysts’ expectations.
RIL’s net profit rose 14% year-on-year for the quarter ended March 2007, even though sales grew just 4% in the quarter, thanks largely to its refining business, which accounts for roughly two thirds of its sales and profits.
The gross refining margin rose by almost 25% on a year-on-year basis and was almost 10% higher than that for the quarter ended December 2007. A rise in global crude prices and a short supply of refining capacity globally allowed the company to extract maximum profits from this business segment. Reliance made money from its refining business in two ways: reducing input costs by buying lower quality and cheaper crude oil; and utilizing its locational advantage and captive port facilities to export the predominant portion of refined fuels.
This way, India’s largest private sector company was able to maximize profits by getting international prices rather than sell petrol and diesel below cost in India. As a result, the refinery’s exports during the year grew 92% to $11.3 billion (Rs46,330 crore). In contrast, even India’s largest public sector oil marketing company Indian Oil Corp. sells its branded premium fuel in India at a loss (which, in turn, is made good by the government).
The second engine of Reliance’s growth—petrochemicals—saw profit margins dip as a rise in the price of raw materials was not matched by a rise in the price of the finished product. Also, the global shortage of petrochemicals capacity is over, leading to pressure on prices. While Reliance dominates India’s petrochemicals industry, an easy import regime means that domestic prices are closely linked to international prices. The company did, however, manage to boost volume of petrochemicals produced, while reducing the amount of money employed in the business to boost return.
The $25 billion company stepped up expenditure on exploring and producing oil and gas as it rushed to meet its promised deadline to produce natural gas for an energy deficit economy by mid-2008. The doubling of investments in the year ended March 2007 is a prelude to further investments in the business in the current year.
Reliance’s retail business too seems to be progressing well with 135 Reliance Fresh outlets now operational.
Analysts have been predicting a downturn in the refining as well as the petrochemicals business, thanks to new capacities coming on stream. That hasn’t happened yet. The hope is that when the refining cycle turns downwards, profits will be boosted by earnings from the natural gas business. In any case, the stock price is now dependent largely on news flow from its new businesses of oil and gas and retail.
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First Published: Fri, Apr 27 2007. 12 14 AM IST
More Topics: Money Matters | Equities |