Also See Markets Disappointed (Graphic)

Average Asian refining margins represented by the Singapore crack spreads have dropped by more than 30% on a quarter-on-quarter basis to $5.60 (Rs278.88 today) a barrel in the September quarter. In Reliance’s case, however, gross refining margins have fallen by less than 15% to $13.40 a barrel. As a result, profit of the refining division fell by 8.8% sequentially to Rs2,774 crore.

Needless to say, there’s more pain to come. According to an analyst, Singapore crack spreads have hit levels of about $2 a barrel this month and the outlook continues to be weak because of the global slowdown. That this has come at a time when it subsidiary company, Reliance Petroleum Ltd, is just coming on stream is a negative.

Last quarter, the drop in the profit of the refining division was more than made up by a gain in the profit of its petrochemicals division. Just as the increase in the prices of petrochemical products lagged the increase in the price of feedstock, now the drop in product prices is lagging the fall in oil prices.

As a result, margins of the petrochemicals business increased from 10.6% in the June quarter to 12.2% last quarter. Profit of the division rose by 20% sequentially, although revenues rose by just 4.6%.

Since 1 September, Reliance’s shares have fallen by 43%, while the Nifty index has fallen by 32%. While one of the reasons is the sharp rate at which refining margins have fallen, the markets have also been disappointed about the delay in the commercial production of gas and the fact that market expectations of an early commencement of Reliance Petroleum’s output hasn’t materialized.

Valuations have now fallen to about 10 times the estimated earnings for the current year, but as an analyst points out, these estimates may have to be reworked to adjust for the delay in gas output.

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Graphics by Paras Jain / Mint