Falling crude oil prices have not yet eaten into the refining margins of Reliance Industries Ltd (RIL). It’s perhaps the most important factor that is keeping sentiment upbeat on the stock, which has outperformed the benchmark Sensex since the company announced spectacular September quarter numbers. RIL had reported a premium of as much as $4.3 per barrel in its gross refining margins (GRMs), an important measure of profitability, versus benchmark Singapore refining margins at that time. In the December quarter, the situation is not much different, although the premium has declined to $3.5 per barrel (see chart).

RIL’s GRM last quarter was $11.5 per barrel, higher both sequentially and year-on-year. While the measure was in line with most analysts’ expectations, some had forecast it to be even better. For instance, analysts at Kotak Institutional Equities and Barclays had expected a GRM of $12 and $12.1, per barrel respectively. Still, with consolidated refining Ebit (earnings before interest and tax) nearly doubling from the year-ago quarter and about one-fifth higher than the September quarter, investors are unlikely to complain.

Refining margins were helped by strong gasoline and naphtha cracks, a seasonal rebound in middle distillates cracks, robust demand growth and better crude oil sourcing. Cracks refer to the difference between crude oil price and refined product price. Refining Ebit, which accounted for slightly more than two-thirds of the total Ebit, also got a boost from the record crude oil throughput of 18 million tonnes. The utilization rate of 116% was higher than average utilization rates for refineries globally in North America, Europe and Asia.

It’s worth noting that while the refining business was expected to show good numbers, RIL’s petrochemicals business too performed well; its Ebit rose by 28% from a year ago. According to the company, strong polymer deltas (the rate of change in prices compared with the change in unit costs) and stable polyester chain deltas along with higher volumes supported growth in petrochemical earnings.

To be sure, the fall in crude oil prices does reflect in the 27% drop in revenue to 68,261 crore. However, the fact that pre-tax earnings has increased by two-fifths over the same period last year to 9,740 crore clearly highlights that stronger profit margins have played a big role in boosting profit last quarter. Interest expenses declined 20% last quarter. Further, for the December 2014 quarter, pre-tax earnings were flat, making growth look robust this time around. Nevertheless, an overall operating profit margin of 16.7% is the highest in at least 10 quarters and that is commendable.

What of the future?

With contribution from oil and gas, and organized retail in the overall scheme of things being small right now, the company’s fortunes will centre on the performance of refining and petrochemicals in the near term.

Sure, with expectations that Chinese consumption growth is slowing down, some analysts expect demand growth of petroleum products to moderate. The good news is that Singapore GRMs are stronger so far this quarter compared with the December quarter. “As long as demand for refined products remains strong, which has been the case recently, refining margins will continue to be strong," an analyst said on condition of anonymity.

However, after the recent outperformance, analysts say the RIL stock seems to be factoring in a good share of the optimism. The stock trades at 11 times its estimated earnings for the next fiscal year. Further, even as expectations from the telecom business aren’t too high, any unpleasant surprises could be detrimental.

“RIL’s key refining and petrochemicals projects are on track for gradual completion in 2016-17F. While the upside potential from these projects now looks less significant on the weak oil price trend, the projects should remain as key earnings drivers over the next three years," analysts from Nomura Research wrote in a note to clients on 30 November.

The writer does not own shares in the above-mentioned companies.