The results of Reliance Industries Ltd (RIL) for the fourth quarter ended March didn’t include any major surprises. Revenues fell by 24% to Rs28,362 crore, thanks to a sharp fall in both product prices in the petrochemicals business and in refining margins. Profit before tax and exceptional items fell by just 0.6% year-on-year (y-o-y) to Rs4,626 crore, but that’s primarily because of a jump in other income.
Other income accounted for more than one fifth of pre-tax profit, up from a mere 6% in the year-ago March quarter and 7% in the first three quarters of the year. Excluding the high other income, profit fell by 16.8% to Rs3,633 crore.
The other income is largely on account of interest earned on bank deposits (of around Rs25,000 crore), apart from an insurance claim worth Rs60 crore. Reliance provided for an amount of Rs370 crore as impairment of value in some of its subsidiaries, excluding which it reported a net profit of Rs3,874 crore. While this is ahead of most analysts’ expectations, the difference is largely on account of the high other income. The refining business bore the brunt of the downturn in the global economy, with operating profit falling by 31% on a y-o-y basis. While revenues of the petrochemicals division fell sharply, owing to lower product prices, margins of the division improved, with prices of raw materials falling at a faster pace. The outlook for both the refining and petrochemicals business remains weak thanks to the downturn in the global economy. Most companies in the sector are operating at suboptimal capacity utilization levels, and the company now nee
ds to find buyers even for Reliance Petroleum Ltd’s newly commissioned refinery.
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According to the company, buyers are likely to prefer the clean fuels its new refinery will produce in favour of the produce of older refineries. The company has also resumed, albeit at a small scale, its fuel retailing business, thanks to the current low levels of crude prices, which now make the business viable.
Still, the overall refining and petrochemicals business will be faced with the vagaries of the global slowdown. A large chunk of the company’s valuation, however, now comes from its emerging exploration and production (E&P) business. Citigroup estimated the value of this business at Rs606 per share in early March, or about two-fifths of its target price, also pointing out that the E&P business partly mitigates the impact of the global slowdown on the cyclical components of its business.
The Reliance stock has risen by about 53% from its lows in March and now seems to capture further upsides in the E&P business through new discoveries.
Needless to say, any delay in the drilling programme of new discoveries and reaching target gas production levels at KG-D6 will weigh down the stock.
Graphics by Sandeep Bhatnagar/Mint
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