Analysts expect RIL net profit to drop, on refining margins

Analysts expect RIL net profit to drop, on refining margins

Mumbai: Analysts expect a drop in net profits and a slight spike in revenues of Reliance Industries Ltd (RIL) for the three months to September as refining margins stay subdued and ramp up of gas production is slower than expected.

A Mint poll of numbers crunched by analysts from seven domestic and foreign brokerages has thrown up an average expected profit after tax of Rs3,758.76 crore and revenues of Rs45,827.25 crore, a rise of over 2%, from Rs44,787 crore RIL had reported in the same quarter last year. It had reported profits of Rs4,122 crore for the September quarter in 2008.

There was a virtual convergence in earnings analysis, with four out of six analysts (one analyst did not give estimates) pitching RIL’s gross refining margins—earnings from turning crude oil into a variety of fuels—at $6.5 (Rs303) a barrel.

The other two put the figures at $6 and $6.9 per barrel. Profit figures, too, reflect the same convergence in estimates. India’s most valuable firm has not announced the date for publishing its financial results as yet.

“It will be very difficult for RIL’s profits to breach the Rs3,900 crore level, primarily because of weakness in refining margins. Also, the ramp up from KG D6 (oilfield in the Krishna-Godavari, or KG basin off India’s east coast) has been slow," said a Mumbai-based sector analyst with a foreign brokerage, who did not want to be identified as he is not authorized to speak to the media.

According to him, the gas production should have hit 40 million standard cu. m a day (mscmd) in June-July. “The gas pick-up has not been as expected and that is completely an exogenous factor for RIL."

Niraj Mansingka and two other analysts with Edelweiss Securities Ltd wrote in a 7 October note to clients that they expected “higher contribution from oil and gas segment as KG gas production ramped up to 36-37 mmscmd currently" and “tepid performance of petrochemicals segment".

They added that an “increase in earnings from higher gas output and merger of RPL (Reliance Petroleum Ltd) refinery (could) offset the fall in refining margins and petrochemicals Ebit (earnings before interest and tax)", but predicted refining overcapacity will be denting margins in the next 12 months.

P.M.S. Prasad, RIL’s executive director, in a media briefing in February this year had indicated that the company wants to speed up the production from KG D6 and hit the peak capacity output of 80 mscmd by December this year—a target that increasingly seems hard to achieve.

RIL’s KG D6 block, the country’s most prolific gas find that started production in April, is being viewed as the company’s biggest money-spinner for the next few years, but remains saddled with government regulations that determine users, quantity and price of gas and an ongoing lawsuit with estranged brother Anil Ambani’s Reliance Natural Resources Ltd (RNRL) in the Supreme Court.

The second recent addition to RIL’s asset portfolio has been RPL’s 580,000 barrels a day Jamnagar refinery, which was commissioned in end-2008, but the firm has a uphill task of selling high-quality fuels in an oversupplied global market.

The excitement in the first quarter of this fiscal was rooted in these two projects—both biggest in their respective sectors—coming on stream and contributing to the revenues for the first time in the April-June quarter.

“Weaknesses persist in refining, retail (sectors). Though petrochemical margins have rebounded, petrol and diesel margins have plunged in the red due to a spurt in crude prices. Moreover, refining margins continue to remain soft... With abundant petrochemical capacities coming on stream, we expect these margins to come under pressure," wrote ICICI Securities Ltd’s analysts Amit Mishra and Gagan Dixit in a 5 October report.

The current quarter to December could throw up more excitement as gas production increases—maybe at a faster pace—and clarity emerges on the legal spat over sharing of gas between RIL and RNRL.

A lot is playing on the investors’ sentiments, with RIL having announced a 1:1 bonus share offer last week to reward shareholders and the younger Ambani making peace overtures to his elder brother on Sunday that could possibly pave way for some kind of a reconciliation.

Citibank’s analysts Rahul Singh and Saurabh Handa, who have a “hold" rating on the stock, on 8 October spelt out that a “more constructive view on RIL would be contingent" on three critical issues—“marked improvement in refining outlook, settling gas dispute and stock correction".

A 9 October Kotak report pointed out another positive trigger for the stock: that RIL needs to announce additional recoverable hydrocarbon reserves of 50 trillion cu. ft “to justify the current stock price". It has a “sell" rating on the firm.