Mumbai: Reliance Industries Ltd (RIL), India’s most valuable company by market capitalization, posted a better- than-expected 16% rise in net profit—its first profit increase in more than a year—buoyed by earnings from gas sales and its new refinery.

Graphic: Ahmed Raza Khan / Mint

The higher earnings may help fund the company’s bid to acquire bankrupt chemicals and fuels maker LyondellBasell Industries AF, which, if successful, would give it access to Western markets. RIL has also said it may buy oil fields in the Gulf of Mexico and Brazil.

The numbers, which showed the immediate impact of an increase in output from its gas fields, and hinted that these will be a major profit driver for RIL in the coming quarters failed to enthuse investors—despite serving to offset lower earnings from processing oil.

Shares of RIL closed almost flat, losing 0.06%, to end trading on the Bombay Stock Exchange at Rs1,053.15 each on Friday, even as the exchange’s benchmark Sensex index lost 1.12%, largely on global cues, to close at 16,859.68 points.

Margins at RIL’s flagship business nearly halved to $5.90 (around Rs273) a barrel, but still beat market estimates.

“The GRMs (gross refining margins) are higher than expected. The company has done a better job here...(it) could be because of better product mix and operational efficiency," said Maulik Patel, head of research at Mumbai-based KR Choksey Shares and Securities Pvt. Ltd. Gas was the primary factor propping up profits, added Patel, and will continue to do so in the coming quarters as well.

Analysts expect refining margins to rise as the global economy recovers.

“We expect refining margins to improve if crude oil prices remain at the current levels," said K.K. Mittal, head of portfolio management services at Globe Capital Market Ltd. “The volumes will come from the gas business...and that is what we have to watch out for."

“We have a premium of about $4 (per barrel) over Singapore GRMs and it has expanded for the first time in several quarters despite increasing volumes," RIL’s chief financial officer Alok Agarwal told reporters, adding that he was confident the company would see higher refining margins in 2010.

RIL chairman Mukesh Ambani said in a statement that he was “delighted that both.. (the) key projects, namely the new SEZ refinery and KG D6 oil and gas development, have ramped up successfully and safely".

Reports put out by analysts tracking RIL ahead of its results indicated that they were expecting a surge in profit and revenue on the back of gas sales from RIL’s prolific D6 block in the Krishna-Godavari (KG) basin, off India’s east coast, as well as a “base effect" in year-on-year comparisons, as adverse macroeconomic conditions and the global financial meltdown had depressed the company’s financials in the quarter ended December last year. Moreover, two significant contributors to the company’s revenue in the quarter ended December 2009—KG D6 gas and the new Jamnagar refinery—were not around in 2008.

RIL increased output at KG D6, India’s biggest gas field. The full impact of the ramp-up in gas production, up to 60 million standard cu. m a day (mscmd) of gas, is reflected in the company’s books. The revenue of the exploration and production segment jumped 242% to Rs3,530 crore in the October-December quarter.

RIL has already tested its facilities to expand gas production to 80 mscmd, but has not decided on a time frame for this. It has executed supply agreements with 48 customers for delivery of over 61 mscmd of gas, said the company statement. RIL is awaiting the verdict of the Supreme Court in a lawsuit over the sale of gas from the KG D6 field. Anil Ambani, Mukesh Ambani’s estranged brother, wants RIL to supply gas to his company at a rate agreed when the family business was split between the two brothers. RIL says it can’t sell at less than the rate set by the government and to buyers not approved by the Centre. The court reserved judgement after the arguments ended last month.

RIL’s new 580,000 barrels a day refinery in Jamnagar operated at 115% capacity while its older, adjacent refinery operated at full capacity rates that are among the highest globally at a time when average refinery utilization rate was 81.6% in North America, 76.4% in Europe and 81.6% in Asia, added the statement.

The bread-and-butter refining business for RIL accounts for the highest proportion of overall company revenues. For the December quarter, this segment had revenue of Rs48,000 crore, up 143% from last year.

The petrochemicals business also ended the quarter with a 17% increase in revenue to Rs14,756 crore and 20% increase in production, driven by domestic demand, at a time when its global peers are battling subdued demand.

RIL’s sound financial performance and several fund-raising exercises—it has raised Rs9,300 crore by selling its own shares in three tranches in the past four months—could increase its chances of acquiring LyondellBasell and force the latter’s management to consider its offer seriously. Agarwal declined an update on the takeover or whether the company was looking to sell more shares to raise money.

Buying the Netherlands-based company, which may be valued at as much as $14.5 billion, will create a company with at least $80 billion in revenue and give RIL plants and two refineries in the US and Europe.

For the nine months ended 31 December, the company had Rs70,008 crore outstanding debt, cash and cash equivalents of Rs15,959 crore and had spent Rs7,858 crore by way of capital expenditure on its projects.

The company had a much higher depreciation provisioning of Rs2,795 crore this quarter, compared with Rs1,323 crore last year and an “other income" of Rs508 crore, down from Rs663 crore last year.

Bloomberg’s Rakteem Katakey and Reuters’ Pratish Narayanan contributed to this story.