Mukesh Ambani-controlled Reliance Industries Ltd (RIL) reported lacklustre results for the September quarter, with net profit rising by just 5.9% sequentially to Rs3,852 crore, despite the merger with Reliance Petroleum Ltd (RPL). Although the appointed date for merger was 1 April 2008, this is the first time combined results have been announced, as the high court’s sanction was awaited.
Operating profit rose by 22% sequentially to Rs7,217 crore, thanks to the merger and an increase in oil and gas production. With RPL being merged, the gross block has naturally increased and even the oil and gas assets in the Krishna-Godavari basin were capitalized from May, resulting in higher depreciation.
Till assets are commissioned for production, the interest cost related to them can be capitalized and don’t affect the profit and loss statement. Owing to an increase in capitalized assets, both interest costs and depreciation charges jumped sharply on a quarter-on-quarter basis, leading to subdued growth in net profit.
On a like-to-like basis, i.e. including RPL numbers in the June quarter results, profit of the refining division rose by just 3.7% last quarter. This is despite an increase in throughput in excess of 30%, driven by a sharp increase in RPL’s production. Gross refining margin (GRM) across RIL and RPL’s units stood at $6 (Rs285) per barrel, lower than the $6.8 per barrel combined GRM for the June quarter. In the June quarter, when the firm had reported stand-alone numbers, it had reported a GRM of $7.5 per barrel for RIL. RPL is currently operating at lower GRMs since it is still in the relatively early stages of production. But the softness in spreads across the industry has affected RIL as well, as is evident from the subdued growth in its refining profit.
Graphics: Ahmed Raza Khan / Mint
The petrochemicals business, too, reported a growth of only 4% sequentially. While prices of polymer and polyester were higher quarter-on-quarter, those of naptha (an input) rose at an even higher rate, leading to pressure on margins. The oil and gas exploration and production business did well, reporting a 21.6% jump in profit quarter-on-quarter, thanks to increased production and higher realizations on oil produced at the Krishna-Godavari basin, owing to lower discounts.
While the firm’s net profit was only marginally lower than consensus estimates, the weakness in the refining business could cause the firm’s shares to be under pressure. The average Singapore refining margin had fallen to below $2 per barrel in early October, compared with an average of $3.3 per barrel in the September quarter. What’s more, at current levels of Rs2,000, the stock seems to be fairly valued. Citigroup Research, for instance, has a sum-of-the-parts valuation of Rs2,015 for the stock, which factors in a moderate recovery in GRMs. With the dispute over gas pricing also being unresolved, prospects for the stock aren’t bright.
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