Ahead of its Q2 results announcement, shares of Reliance Industries Ltd (RIL) touched a new 52-week high of Rs1427.90 a piece on Friday. This took the company’s market capitalization to over Rs9 trillion, making it the first Indian company to cross this threshold. Do the company’s September quarter results justify the optimism?

Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

In keeping with better refining conditions, RIL’s gross refining margin (GRM) has increased to $9.4 per barrel in Q2FY20 from $8.1 per barrel in the June quarter. Benchmark Singapore GRM improved on a quarter-on-quarter basis to $6.5 a barrel. The broad expectation was that RIL’s GRM would be around $9.5 a barrel, but the company’s premium over Singapore margins fell. According to the company, “The premium over Singapore complex margins declined as strength in FO (fuel oil) cracks supported Singapore margins. Additionally, tighter crude markets for heavy crudes resulted in higher costs."

Nevertheless, earnings before interest and tax (Ebit) of the refining business rose 10% sequentially. The implementation of the International Maritime Organization’s (IMO’s) new regulations from 2020 are resulting in a recovery in refining margins, and hence prospects for this division are clearly looking up compared to earlier this year.

On the other hand, petrochemicals margins remained weak. Revenues from the petchem business rose only 2.5% sequentially, although production volumes rose 13.8%. The division’s Ebit saw a quarter-on-quarter increase of only 1.3%. Spreads on most petchem products have been soft, which has been offset by higher volumes.

Reliance Jio Infocomm continued on its strong growth path, with Ebit rising as much as 11.9% sequentially, on the back of steady subscriber growth and a 5.8% increase in revenues. The retail business continues to perform well with its Ebit increasing by 14.5% sequentially, on the back of a 7.9% q-o-q increase in revenues.

On a year-on-year basis, Ebit of both the refining and petchem businesses were lower, but the consumer business more than made up for this. As a result, consolidated Ebit rose 8.7%, which is commendable, considering that the two energy businesses accounted for over 80% of consolidated Ebit a year ago.

Going forward, investors will watch the trend in refining margins and the progress on the planned debt reduction. “While we should see GRMs remain strong in the near term, the key questions are a) how long would any IMO related uplift sustain; b) how margins trends as outages and maintenance is behind us; and c) what happens to refining margins in 2HCY20 once IMO is broadly behind us," J.P. Morgan India Pvt. Ltd in a report on 7 October.

There was not much debt reduction to speak of in Q2, although the company said that capex has come down. This would be a key area to monitor, as RIL shares have zoomed ever since the company said it intends to cut net debt to zero by fiscal 2020-21.

Close