Reliance Industries Ltd (RIL) had reported a premium of $3.1 per barrel over the Singapore gross refining margin (GRM) for the March quarter. For the June quarter, that premium was expected to expand further. However, the reported premium of $6.5 per barrel, the highest in the last eight years according to RIL, far exceeded Street estimates. Most analysts had estimated the company’s GRM to be in the range of $9.5-10 per barrel. On the contrary, RIL’s GRM in the June quarter came in at $11.5 per barrel.
There are a couple of reasons for this outperformance. One, as Alok Agarwal, chief financial officer at RIL, said, “We did have a build-up in inventory towards the end of last quarter and we were able to liquidate that inventory at better prices than at the end of the last quarter". Secondly, middle distillates, which include gas oil (diesel) and aviation fuel and account for nearly 45% of the company’s product slate, performed better. “Our crude sourcing was competitive too," pointed out Agarwal.
Even as the GRM beat is strong, not everybody is impressed. “There’s no point in taking a call on GRM alone," said independent analyst S.P. Tulsian. He added that looking at inventory at the end of the last fiscal year, it is likely that inventory gains, perhaps to the extent of approximately $2.5 per barrel, are included in the reported GRM.
Nonetheless, the fact remains that a strong performance by the refining segment did help the company beat analysts’ estimates by a good margin. But it’s worth remembering that the RIL stock has already gone up in the past five trading sessions.
Moreover, the performance of other business segments is not very encouraging. Sure, petrochemicals business Ebit (earnings before interest and tax) margin improved to 14.9% from 14% in the March quarter. But that was largely in line with Street estimates. While the oil and gas business reported an Ebit of ₹ 48 crore compared with a loss in the March quarter, it hardly moves the needle for RIL. Losses of US shale operations increased.
Stand-alone revenue declined about 19%, reflecting the decline in broader crude oil prices, while net profit increased about 19% to ₹ 7,548 crore. That was because of a 628 basis point jump in operating profit margin to 20%, while depreciation cost declined 3% and “other income" increased 18.5%, helping net profit growth. A basis point is 0.01%.
What of the stock? RIL shares have underperformed the benchmark Sensex since it announced its March quarter numbers. Some reasons for the underperformance can be attributed to the fact that the company had guided analysts about delays in commissioning of its downstream projects, lower refining margin environment and lack of clarity on the timelines of its telecom launch.
Currently, one RIL share trades at about 11 times its estimated earnings per share for this fiscal year. Of course, news flow on the telecom launch will be an important measure to track and so will developments on commissioning of downstream expansion projects.
In the near term, what is worrisome is that Singapore refining margins have hardly improved. Even as RIL delivered a great beat in the June quarter, the pertinent questions are whether that will sustain.
As of now, analysts don’t see inventory gains recurring for the current quarter.
The crude spreads that are relevant to RIL’s refineries have contracted in June and July 2016 from levels in April and May 2016, according to ICICI Securities Ltd. “This contraction of light-heavy crude spread would hit RIL’s GRM if it sustains," wrote analysts from ICICI Securities in a note on 7 July.
Unfortunately for investors, it could well mean that the robust GRM performance seen last quarter may not be repeated in the current one.
The writer does not have positions in the companies discussed here.