Reliance Industries Ltd’s year-on-year (y-o-y) growth numbers look very impressive because of a low base in the previous year, but its results are largely in line with expectations. Revenue rose by 88% y-o-y, but was about 4% short of the mean estimate of seven analysts compiled by Mint. Similarly, operating profit rose by 46% y-o-y, but was about 1% lower than the mean estimate.
The reported net profit was about 1% higher, and the results are unlikely to alter the company’s valuation in any significant way. There has been a large increase in gas production in the past year, due to which a y-o-y comparison doesn’t make much sense.
The company reported a gross refining margin of $7.3 (Rs341.64) per barrel, at a premium of $3.7 to Singapore refining margins. This is an improvement compared with the premium of $2.6 per barrel in the March quarter. Profit of the refining division was slightly higher than some analysts’ estimates and made up for the underperformance in the petrochemicals business. The petrochemicals division witnessed a 10% drop in revenue quarter-on-quarter, partly due to a cracker turnaround at its Hazira and Nagothane facilities. This affected production of ethylene and propylene. Profit of the petrochemicals division was slightly lower than estimates. Profit of the oil and gas business rose as a result of the increase in production and a higher proportion of oil production.
The results are unlikely to affect RIL’s shares materially—its global depository receipts (GDRs) were trading flat on the London Stock Exchange post-results.
A Citigroup note dated 18 June points out: “The stock is pricing in a moderate but sustained refining recovery and meaningful exploration upsides. While a 50% premium to NAV looks justified for the E&P (exploration and production) business, given new discoveries and the intensive exploration calendar, present stock valuations leave little room for disappointment, especially given the long gestation from discovery to production.” An assumption of a sustained recovery in the refining cycle may also come undone if the global economy falters.
On the other hand, the firm’s recent acquisitions in the gas space and its entry into telecom are being seen positively, simply because it gives opportunity to deploy excess cash. Again, it remains to be seen if these ventures will be value-accretive.
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