Reliance Industries Ltd’s shares have underperformed the market by 14.4% since mid-June on account of the adverse court ruling related to the pricing of its gas as well as unfavourable tax proposals. The company’s results for the June quarter have the potential to do further damage to its valuations.
The company reported a net profit of Rs3,636 crore, around 9% short of the consensus street estimate of Rs4,000 crore. This is based on a poll of 13 brokerages by Bloomberg.
The main concern is the company’s gross refining margin of $7.5 (around Rs363) a barrel. For a number of quarters now, Reliance has been defying street estimates of its gross refining margin, always reporting a much better than expected spread over the benchmark Singapore refining margin. According to an analyst, for a change the spread over the Asian average has narrowed in the June quarter.
Another disappointment was majority-owned arm Reliance Petroleum Ltd reporting a gross refining margin of just $5.4 a barrel. Considering that this new refinery is more complex, one would have expected its margins to be higher than those of the parent company. An analyst said RPL’s Rs105 crore reported profit is also low.
The uncertainty on the gas pricing has added to the uncertainty in Reliance in recent months. Ahmed Raza Khan / Mint
The petrochemicals business did reasonably well to report a 21% quarter-on-quarter growth in profit before interest and tax. The exploration and production business saw a jump in profit thanks to the commissioning of the KG-D6 block off the east coast. But the profit reported by these two held no major surprise. The refining division, which saw a 43% drop in earnings before interest and tax, disappointed.
Interestingly, Reliance has provided for current tax at the revised 17% minimum alternate tax (MAT) rate, implying that it expects the tax holiday under section 80IB of the Income-tax Act to be applicable for producing D6 gas. The Budget had outlined that the benefit will be available for blocks licensed under the eighth round of the new exploration policy. The D6 block, of course, was awarded in an earlier round and the street has been worried that it won’t qualify for the tax holiday, and that as a result the firm would be outside MAT purview.
Reliance may have good reasons to provide for tax at the MAT rate, and this could be seen as a positive surprise, since the street has been factoring in the worst on this regard.
But even if the outcome on the 80IB front is favourable eventually, the fact that the MAT rate has been raised from around 11% to 17% and the uncertainty on the gas pricing has added to the uncertainty in Reliance in recent months. The lower-than-expected refining margins could just add to the negative sentiment surrounding the stock at the moment.
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