Reliance Industries: Q3 FY12 earnings review

India’s largest company by market capitalisation, RIL, has posted net profits of Rs 4440 cr in the Dec 2011 quarter, down 22% from Rs 5703 cr reported in the Sep 2011 quarter. On a yearly basis, the company's net profits have declined by 14%. The results were in line with the street expectations, and consequently, the stock closed at Rs 793.35 a share, up by 1.04% on the BSE.

Following expectations, RIL’s financial performance was severely impacted as the margin pressures were accentuated by the sluggish performance of 2 of its main businesses – Refining and Petrochemicals – which have seen moderation in the demand environment. The unabated woes faced by its oil & gas business, owing to the lagging KG-D6 output, also hurt its financials.

As a result of a steep fall in product cracks, particularly in light distillates and solids, the company’s Gross Refining Margin (GRM) for the Dec 2011 quarter came in at a dismal US$ 6.8 per barrel as against US$ 9 per barrel in the same quarter last year. During the Sep 2011 quarter, the GRM was robust at US$ 10.1 per barrel. An important point to be noted is that this is the first time that RIL’s GRM has fallen below the benchmark Singapore GRM, which was at USD 7.4 per barrel.

Ditto for the petrochemical segment, where the company witnessed a sharp erosion of 430 bps at the EBIT level as a result of weak demand coupled with high feedstock prices. In fact, on a QoQ basis, the petrochemical revenues have dipped by 6%, with net profits down by 11%.

The only respite for the oil & gas major, other than the 40% (YoY) jump in its topline, was the spurt in its Other Income, which was benefited by the treasury income on ample cash balances on the balance sheet to the tune of Rs 74539 cr. RIL's Other Income rose by 132% (YoY) to Rs 1717 cr.

It must be noted here that Other Income contributed more that the segmental EBIT of its refining and oil & gas business, which were at Rs 1685 crore and Rs 1294 crore respectively. To put it in a nutshell, the performance from the non-operational segments of the company was far better that the performance of its two operational segments.

A key highlight of RIL's Q3 results was its proposed buyback offer. The company has finally proposed to buy back its 12 cr equity shares from the market at a price not exceeding Rs 870 per share. The total amount of the buyback offer is thus pegged at Rs 10440 cr, which translates into 3.6% of its equity value. Now, as per the SEBI norms, the company has to mandatorily buy back 26% of the intended amount, which translates into Rs 2714 cr worth of shares. The last time RIL had announced a buyback in the year 2004, it ended up buying only 5% of the intended buyback offer.

In conclusion, we believe that the sentimental boost of the company buying back its shares will be overshadowed by its weak Q3 earnings. RIL has reported an all-round dismal performance across all of its segments, and the outlook looks gloomy going forward. Moreover, this proposed buyback offer has come in at the lower band of street estimates, which expected the buyback offer to come at a price of over Rs 900 per share, amounting to nearly Rs 14000 cr.

We, at DSIJ, advise investors to stay away from the counter, as we expect the share price to drop next week on the back of profit taking.