
Mumbai: A sharp fall in Oil and Natural Gas Corp. Ltd’s (ONGC’s) profit in the fiscal year ended 31 March, because of a steep drop in the price of crude, has vaulted Mukesh Ambani’s Reliance Industries Ltd (RIL) to the position of India’s most profitable company.
ONGC slipped to number three with a consolidated net profit of ₹ 18,333.52 crore in 2014-15, behind RIL and Tata Consultancy Services Ltd (TCS), the country’s top software services exporter.
RIL, with business interests ranging from oil and yarn to retail, ended the year with a consolidated net profit of ₹ 23,566 crore—its highest annual profit ever—as refining margins rose. TCS was the second most profitable entity with a consolidated profit after tax of ₹ 19,852 crore.
Even on a standalone basis, ONGC slipped to the third spot with a net profit of ₹ 17,733 crore, well short of the ₹ 22,719 crore reported by RIL.
It may be difficult for ONGC to regain the top spot, analysts said, particularly because RIL is coming close to the end of its capital expenditure (capex) cycle. Some of this capex will start adding to RIL’s profit by the end of the current fiscal year as its expanded petrochemical capacity starts coming on stream.
“By the end of next year, we expect RIL to have a bottomline of ₹ 27,000 crore, considering a 15% growth rate. Beyond that, the profitability will post a major jump as the benefits of its refining and petrochemical expansion will start reflecting on its balance sheet by the second half of the next fiscal year (2016-17),” said an analyst with a domestic securities house who did not want to be named as he is not authorized to speak to the media.
The analyst added that the benefit of the company’s expansion will be reflected in its earnings from 2017-18.
According to data available from corporate database Capitaline, in the last 10 years, RIL’s profit has grown by a compound annual growth rate (CAGR) of 10.75%; ONGC’s profit has seen 1.96% CAGR growth in the same period.
In 2005-06, RIL’s consolidated net profit was ₹ 9,398 crore. ONGC reported a net profit of ₹ 15,397.63 crore that year.
In March 2012, RIL embarked on a $12 billion capex programme, spread over four years, which envisaged a near doubling of its profit from its core operations by 2016-17.
A big part of the capex was directed at setting up a petcoke gasification plant and a refinery off-gas cracker complex (waste gas released during crude oil refining which will be captured and used for further treatment). The company also planned a 60% expansion of its petrochemical capacity by financial year 2016-17.
The petcoke project entails converting the petcoke produced internally at its Jamnagar refinery into a specialized gas that will be used as feedstock for a new chemical complex, fuel the refinery’s existing gas turbines for power generation and provide feedstock for production of petrochemicals.
The projects are expected to be completed by the end of the current financial year and are likely to boost the company’s gross refining margin (GRM)—the biggest determinant of its profitability—by almost $2.5 per barrel, the company said at a post-earnings analysts’ meeting on 17 April.
GRM is the difference between the price of a barrel of crude oil and the value of products distilled from it.
Two international brokerage—Goldman Sachs and CLSA—estimate that RIL’s net profit will cross ₹ 35,000 crore in 2016-17, according to reports they released after the company’s earnings announcement.
The one dampener for RIL could be the $14 billion it has invested in its telecom venture, which is still to see the light of day.
“RIL’s telecom venture could be a major drag on the company’s profitability as we are expecting the company to post losses for at least five years,” said the vice-president of institutional equities at a domestic securities house, requesting anonymity.
ONGC, too, is expected to perform better in the current financial year as the burden of sharing subsidies given to oil marketing companies declines due to lower crude costs and market-linked prices of products like diesel.
IIFL said in a 29 May report that it expects ONGC to deliver 40% earnings growth in 2015-16. The report said that ONGC is not expected to post any growth in production in the current year. ONGC will report a net profit of ₹ 25,892 crore in financial year 2015-16 and ₹ 27,984 crore in the year after, according to IIFL
forecasts.
A senior analyst with an international brokerage who heads the energy vertical for Asia said it will be difficult for ONGC to expand its profit at a rate faster than 10% over the next two years.
“With the government pushing ONGC to increase its production, it will have to invest a huge sum in extra drilling costs and further development in a short span of time. This will impact the company’s profitability as the newer developments that ONGC has lined up incur huge capital investments,” he said.
In contrast, RIL will see its profit jump by almost 50% in the next two years because of its ongoing expansion, added this analyst, who requested anonymity.
In terms of market value, RIL remains in the second spot, with a valuation of ₹ 283,854.26 crore, and ONGC is a close third with a valuation of ₹ 282,288.4 crore. TCS is still India’s top company in terms of market capitalization with a valuation of ₹ 511,345.53 crore.