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RIL profit may drop in March quarter

RIL profit may drop in March quarter

Oil-to-yarn and retail conglomerate Reliance Industries Ltd (RIL) is expected to post a year-on-year (y-o-y) decline in profit for the second quarter in a row as margins in its core businesses of refining and petrochemicals continue to be under pressure.

A consensus of estimates by various brokerages compiled by Bloomberg pegged consolidated net profit at 4,434.5 crore, down 17.5% from the year earlier, despite revenue seen 26.3% higher at 91,813.35 crore. India’s most valuable company will report earnings for the quarter ended 31 March on Friday. However, as has been the case in the last couple of quarters, analysts expect RIL’s profit to receive significant support from other income, which is largely derived from treasury operations utilizing the excess cash on its books.

In the December quarter, other income contributed 1,720 crore to pre-tax profit, according to a 3 April Deutsche Bank (DB) Market Research report, 132% higher than the year ago and a sequential jump of 56%. This led to the ratio of RIL’s other income to profit before tax doubling quarter-on-quarter (q-o-q) to 30% in the December quarter. “We expect other income contribution to pre-tax profits to increase further to 35% in Q4FY12, as cash balances remain high, while Ebitda (earnings before interest, tax, depreciation and amortization) is likely to fall further," the report said.

A 2 April report by Bank of America-Merrill Lynch (BoA-ML) analysts Vidyadhar Ginde and Akash Gupta estimated the operating profit from RIL’s refining and petrochem businesses may have dipped 43% and 22%, respectively, over the year-ago period.

Brokerages also expect RIL’s gross refining margin (GRM), or the difference between the cost of crude and the price of refined products, to fall below the benchmark Singapore GRM for the second consecutive quarter.

The BoA-ML report estimates RIL’s GRM to come in at $6.5 per (Rs 335 today) barrel, below the benchmark GRM of $7.6 per barrel. RIL’s GRM could be 30% lower than the year ago, the report said. The decline in RIL’s GRM would be “despite a 21% q-o-q improvement in Singapore GRM to $8.3 per barrel", according to a 6 March report by Enam Securities Pvt. Ltd.

RIL’s refinery at Jamnagar is one of the most complex plants in the world and can process heavier (impurer and cheaper) crude to yield a product slate of the same quality that other refiners produce using lighter (purer and more expensive) crude. Soaring international prices of crude lead to the price differential between light and heavy crude narrowing, since demand for the latter rises as it’s cheaper.

Between January and March, the price of Brent crude rose 15.6% to $122.88 per barrel. Dealing a double blow, the rupee strengthened against the dollar by around 5%, which made crude more expensive.

Apart from the aforementioned factors, a lower light-heavy crude differential, lower middle distillate (diesel, kerosene) margins and limited production of higher margin distillates (petrol, naphtha and fuel oil) could lead to RIL’s GRM underperfoming the regional benchmark, Enam analysts Amit Mishra and Prashant Tarwadi said in the report.

DB’s equity research team expects RIL’s GRM to be 24% lower than in the corresponding quarter of fiscal 2011. The refining margin earned by RIL’s Jamnagar refinery has traditionally been at a premium to the Singapore GRM, but it slipped below the benchmark for the first time in the December quarter.

Though analysts Somshankar Sinha and Vikash Kumar Jain of CLSA Asia-Pacific Markets wrote in a 3 April report that they expected RIL’s GRM to improve in the March quarter, it would be “offset by 7% lower throughput due to a scheduled maintenance shutdown", they said.

Another potential drag on RIL’s numbers for the March quarter is continuing weakness in its exploration and production (E&P) business. The Enam report states that gas output from RIL’s D6 reservoir in the Krishna-Godavari basin was expected to drop 14.3% sequentially to 36 million standard cubic metres per day (mscmd) in the March quarter, resulting in a 12% q-o-q decline in operating profit from the E&P business.

Gas output from D6 has been rapidly declining over the quarters, with technical complexities hindering production. This came in at around 42 mscmd in the December quarter, whereas it should have been at least 70 mscmd by now, according to the original plan.

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