Reliance Industries Ltd’s (RIL) shares hit a 52-week high recently, but they have underperformed in the last one year, declining 1% against the benchmark Sensex’s 7.5% rise. Note that in 2014-15, RIL’s consolidated earnings per share (EPS) increased by about 5% to 80.10. In the June quarter too, the EPS gain was around the same, with an increase of 4.3% year-on-year (y-o-y) to 21.10, 1.80 higher than Street expectations.

While earnings growth hasn’t changed much, RIL’s shareholders have been a happier lot recently, what with the 24% jump in its share price so far this fiscal year.

What gives? For one, management commentary on the non-core telecom business during its annual general meeting in June seems to have calmed investors’ nerves about the business. Also, the operating environment for the refining business has been strong.

RIL’s June quarter gross refining margin (GRM) was $10.4 a barrel, the best for at least the previous 12 quarters and higher than Street expectations of about $9.5 a barrel. In fact, contrary to Singapore refining margins that have declined sequentially, RIL’s GRMs have seen an improvement compared with the March quarter. The company says strong gasoline cracks led by robust demand growth, lower energy cost and favourable crude differentials helped boost refining margins.

Refining revenue declined y-o-y in keeping with the y-o-y decline in crude oil prices. Still, stronger GRMs and an average utilization rate of 107% meant that the refining business contribution at two-thirds of the total Ebit (earnings before interest and tax) did influence RIL’s numbers in a big way. But then, refining was anyway expected to do well, albeit perhaps not so well.

The real surprise for the June quarter was that Ebit of the petrochemicals business increased by as much as 17% sequentially and accounted for 29% of total Ebit. While petrochemicals revenue declined, as product prices reflected lower crude oil prices, strong polymer deltas (the rate of change in prices compared with the change in unit costs) and a sharp rebound in fibre intermediate deltas were key drivers for the improved earnings. The segment’s Ebit margin, at 11.2%, is the best at least in the last four quarters.

With refining and petrochemicals contributing most of the profit, other businesses lagged miserably. Oil and gas Ebit slipped substantially to 32 crore from 489 crore in the March quarter. RIL’s US shale gas business, which reports numbers with a lag of one quarter, posted an Ebit loss. But, considering the sharp fall in crude oil prices, that isn’t surprising.

It is encouraging that organized retail has been delivering consistently and the last quarter was no different. But this segment is too small for RIL’s size to move the needle in a big way.

Stronger margins across the refining and petrochemicals segments helped RIL report a strong operating performance. Operating profit increased 13% y-o-y despite a fall in revenue. However, a decline in other income and higher finance costs meant that net profit increased just 4.4% to 6,222 crore.

What about future prospects? After two strong quarters for the refining business, the momentum is likely to slow in the current quarter. Refining margins have started declining. According to analysts, so far in this quarter, Singapore GRMs stand at $5.1 a barrel, lower than $8 a barrel seen in the June quarter. Analysts attribute that to a seasonally weak quarter and slow demand. There are no signs of any improvement in the fortunes of the oil and gas business, and retail is too small to matter right now.

The outlook for petrochemicals seems better. Analysts from Antique Stock Broking Ltd wrote in a note last month, “Petchem sector is seeing improved demand on lower oil prices and inventory build-up, which has led to 15-20% higher deltas in the short-term." Integrated companies such as RIL are expected to benefit as chain deltas improve, said the brokerage firm, which estimates return on capital employed in the business to go up to 24% by 2016-17, as it used to be in 2010-12.

Considering that investors are already sitting pretty on good gains, a large part of this optimism is already reflected in the share price. Much depends on the telecom launch scheduled in December. According to an analyst, shareholders might be relieved if the scenario for telecom works out to be even slightly better than expected. But that story will take a long time to unfold. The RIL stock trades at about 13 times its estimated earnings for this fiscal year.

The writer does not have positions in the company discussed here.