Reliance Industries Ltd’s (RIL’s) March quarter results were better than estimates, but only just. Its stand-alone Ebitda (earnings before interest, tax, depreciation and amortization) last quarter stood at Rs.10,727 crore, or about 3% higher than consensus estimates. According to a Bloomberg poll of analysts, Ebitda was estimated at Rs.10,394 crore.
In fact, some brokerage firms such as Kotak Institutional Equities had estimated Ebitda of over Rs.10,700 crore, on the back of strong margins in the petrochemicals segment. As it turns out, margins in the petrochemicals business were strong at 14%, far higher than 10.6% for the March quarter last year. Petrochemicals Ebit (earnings before interest and tax) margins were higher due to strong product deltas (rate of change in prices compared with the change in unit costs) and low absolute product prices. Petrochemicals Ebit increased 29% due to strength in polymer deltas, robust polymer demand and higher volumes in the polyester chain.
Besides, RIL’s gross refining margin (GRM) at $10.8 a barrel was marginally higher than many analysts’ estimates. For instance, Morgan Stanley Research and BNP Paribas Securities (Asia) Ltd were expecting GRM of $10.6 per barrel and $10.5 a barrel, respectively. While the company’s GRM has declined on a sequential basis, this was expected, considering that benchmark Singapore GRM had also declined compared with the December quarter. What’s more, the company has managed to maintain its premium over Singapore GRMs at $3.5 a barrel, as in the December quarter. Strong gasoline and naphtha cracks, robust demand growth and favourable crude markets helped boost refining margins, the company said. Higher utilization rates also helped.
On a consolidated basis, while RIL’s organized retail business has seen a smart 26% year-on-year Ebit growth, this was offset by a sharp drop in the oil and gas segment Ebit (97% year-on-year decline). The stand-alone oil and gas business reported losses at the Ebit level due to lower realization for liquids and a decline in production, while a drop in prices affected the company’s US shale operations.
As pointed out earlier, the results were largely on expected lines and don’t do much to move the needle as far as the stock’s valuations go. Currently, one RIL share trades at 11 times its estimated earnings for this fiscal year. In the near-term though, the fact that refining margin has declined may cloud sentiments for the stock.
So far, quarter-to-date, Singapore GRM has averaged at $5.2 a barrel, according to an analyst, compared with $7.7 in the March quarter. Of course, it would help if petrochemical margins remain steady.
However, over the medium term, the outlook for the stock may turn positive as investors start looking at higher earnings on account of RIL’s expansion plans. As Amit Shah of BNP Paribas writes in a recent report, the benefit of expansion of petchem capacities, pet-coke and refinery off-gas cracker projects would be visible from FY18 onwards.
But on the other hand, the prospects of the telecom business remain an uncertainty. BNP, for instance, has not assigned any value to RIL’s telecom business in its sum-of-parts valuation. Undoubtedly, analysts and investors will keep a close watch on Reliance Jio’s launch and pricing strategy.
The writer does not have positions in the companies discussed here.