Reliance Industries—has the Knight risen?

On the whole, without getting into the nitty-gritty, Reliance Industries Ltd’s (RIL’s) June quarter financial performance exceeded Street expectations. Earnings per share (EPS) for the last quarter stood at Rs 13.70, marginally better than the Bloomberg consensus estimate. Apart from other factors, net profitability was also helped by a decline in tax outgo.

It’s a relief that unlike last time, the quantum of “other income” is not higher than Ebit (earnings before interest and tax) of each of the core businesses. This time the refining business Ebit is higher than other income. In fact, other income for June quarter, though significant, is lower sequentially. Profit from operations is up 10% sequentially. The refining business has performed better than expected. Gross refining margins (GRMs), a key measure of profitability, have come in at $7.6 (Rs 420 today) a barrel, sequentially flat. RIL maintains that GRM remained buoyant on a quarter-on-quarter basis “as the weakness in product cracks was offset by wider light-heavy crude differentials”.

The global business environment is not particularly exciting at the moment and, in that light, RIL’s refining numbers are encouraging. Also, it’s the cyclical refining business that’s saved the day. It’s been a long time since RIL has given even a hint of its former glory. Do the June quarter results show that the former superhero has risen or is at least giving a hint of rising? Not really.

The petrochemicals business has been quite disappointing. The petrochemicals Ebit margin has narrowed to 8% from 10% in the March quarter and 12% in the same period last year. In fact, petrochemicals Ebit margins have consistently declined for the past six quarters and the outlook is not getting better either. “Petrochemical spreads have declined 10% in July, below the five-year average, after rallying smartly on the back of 22% correction in crude price over 1QFY13,” pointed out a note from IIFL Research on Thursday.

Even the refining business outlook is not rosy. Refining margins may be subdued in the near future on low demand, mostly in Europe, and commissioning of refineries. Further, even a slowing Chinese economy does not augur well for the refining business. Singapore GRMs declined 16% month-on-month in June.

It’s been about a month since Canada’s Niko Resources Ltd slashed the proven and probable gas reserve estimate from the D6 block in the Krishna-Godavari (KG) basin. Since then, the RIL stock has declined 2% against the 1.5% gain in the benchmark Sensex. While the woes of RIL’s exploration and production business are well known, it will be a while before things improve on that front. Production from the KG D6 has averaged at 33 million standard cubic metre per day (mscmd), down from 43 mscmd last year. For a while now, brokerages have been trimming RIL’s EPS estimates downwards. Going forward, there is little reason for optimism on revisions. Of course, the situation can improve on big-ticket announcements or a clear-cut plan on the utilization of RIL’s big cash pile. RIL’s release says cash and cash equivalents are at Rs 70,732 crore. That’s a bit lower than the outstanding debt the firm had at June-end.

Meanwhile, RIL’s June quarter investor presentation is more elaborate than last quarter’s, which was well received by analysts. But it will need more than that for investor confidence to improve. Till then, the share buy-back will offer some support to the stock.