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Business News/ Market / Mark-to-market/  Good results from RIL, but margins disappoint
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Good results from RIL, but margins disappoint

RIL's operating profit margin of 7.8% for the June quarter is lower both sequentially as well as on a year-on-year basis

Reliance Industries’ retail business revenue is higher than that of the oil and gas business, though the retail contribution to overall profits is still much smaller. Photo: MintPremium
Reliance Industries’ retail business revenue is higher than that of the oil and gas business, though the retail contribution to overall profits is still much smaller. Photo: Mint

Reliance Industries Ltd (RIL) reported its first consolidated quarterly financial results on Saturday. While improved disclosure and more information for investors is a good thing, it’s unlikely to change analysts’ estimates as far as RIL’s stock valuation is concerned.

The company’s consolidated results for the June quarter are pretty good. Consolidated net profit for the June quarter increased 13.7% year-on-year (y-o-y) to 5,957 crore. It looks impressive considering that the Street was expecting little change on the stand-alone net profit number. Consolidated performance was helped to that extent by the US shale gas business, which performed well.

In the first quarter of 2014-15, revenues were at $270 million and earnings before interest, taxes, depreciation and amortization (Ebitda) was at $201 million, reflecting a y-o-y growth of 26% and 22%, respectively, the company said. Ebitda is a key indicator of profitability.

The organized retail business swung to profit in the June quarter from a loss last year at the Ebit (earnings before interest and taxes) level. In fact, the retail business’ revenue is higher than that of the oil and gas business, though the retail contribution to overall profits is still much smaller.

Let’s get to the stand-alone numbers. RIL reported a 5.5% y-o-y net profit growth on a stand-alone basis to 5,649 crore, surpassing Street estimates. But one reason for that is a decline in depreciation and interest costs.

The refining business, too, performed better than expectations. RIL’s GRM (gross refining margin) came in at $8.7 per barrel, higher than the $8.4 a barrel in the June quarter last year. According to the company, the light-heavy differential of crude oil continues to be supportive for complex refiners. Refining continues to be the saving grace for the company with its Ebit contribution as high as 60.8% in the total Ebit.

On the other hand, RIL’s petrochemicals business delivered a lacklustre performance in the June quarter. Petrochemical Ebit margins declined to 7.9%, the lowest in the last seven quarters. The oil and gas business performance was satisfactory with production from the KG-D6 offshore block at 13 mscmd (million standard cu. m per day).

Overall operating performance was not encouraging. RIL’s operating profit margin of 7.8% for the June quarter is lower both sequentially as well as on a y-o-y basis. Operating profit increased by 6.4% on a y-o-y basis last quarter, similar to the performance seen in the March quarter.

Expectations from the RIL results were not high and the stock does appear to factor in the core business performance to a large extent. So far, since the beginning of this fiscal, the RIL stock has underperformed the benchmark Sensex after outperforming for some time initially. Currently, the stock trades at about 12 times its estimated earnings for the current fiscal. A delay in the gas price hike has been a major party pooper for RIL and news about the hike will be the next big trigger for the stock. The outlook on refining margins though is expected to be lacklustre on account of more capacity additions in the refining industry.

The company is adding capacity in its petrochemicals business. However, analysts remain worried about margins. Polyester margins are weak and demand from China remains muted, said an analyst who did not want to be named. The company though remains hopeful. “Between now and the next two-three years, there will be no real threat to ethylene margins," chief financial officer Alok Agarwal said at the results conference on Saturday. “Touchwood," he added.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 20 Jul 2014, 09:05 PM IST
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