Reliance March Quarter Earnings Preview

The December 2011 quarter for India’s largest company by market capitalisation, Reliance Industries (RIL), was a complete disappointment that it might want to forget. While the woes emanating from the oil & gas exploration business owing to dwindling gas output from the prolific KG-D6 basin accentuated further, there were fresh concerns emerging from its flagship refining business and the demand moderation for the petrochemicals business. The markets were surprised to see its gross refining margins (GRM) for the September-December quarter of 2011 for the first time in many years fall below the benchmark Singapore GRM.

So shocking were the December quarter results that the other income contributed more than the segmental EBIT of its refining and oil & gas business which meant that the performance from the non-operational segments of the company was far better than the performance of its two operational segments.

The Rs 10,000 crore share buy-back program announced by the management on the eve of the results, in a bid to salvage the shares from plunging downwards on result date, also proved to be futile as it failed to bring any cheer to the shareholders. As on date, the company has spent merely Rs 396 crore towards the buy-back program, implying that only 4 per cent of the allocated amount has been spent.

Going forward, the misfortunes for the Mukesh Ambani-led diversified conglomerate are far from over. The March 2012 quarter earnings to be announced on April 20, 2012 are expected to be very much similar to the dismal December 2011 quarter numbers, if not worse. Following up on a previous update (Titled ‘Short Term Relief For Reliance Industries’ dated March 24, 2012) where we had first cautioned readers to stay away from the counter, we believe that while output from the KG basin continues to fall sharply with the latest figures dropping to an all-time low of 34.09 mmscmd, the concerns surrounding the refining and petrochemicals business still continue to persist.

Owing to the continuous decline in the Singapore GRMs between January-March due to a persistent fall in the cracks for jet fuel, fuel oil and diesel, RIL will yet again report weak GRMs in its fourth quarter results. In fact RIL might yet again report GRMs lower than the benchmark Singapore margins. Coming to the petrochemicals business, we believe the performance for this segment would be impacted for yet another quarter due to a fall in the petchem margins of polyester chains, PE-naphtha and propylene, etc.

On the bourses the shares of RIL during the March-ended quarter have also underperformed the benchmark Sensex as they yielded only 5 per cent returns as against the latter’s 12 per cent. In conclusion, owing to the above mentioned woes and the lack of any alpha created through its other businesses we would like to advise our readers to stay away from the counter as we expect it to continue to under-perform post the results’ announcement.