Reliance Industries (RIL) March Quarter Earnings’ Review

As expected, India’s largest company by market capitalisation, Reliance Industries (RIL), posted a 21 per cent (YoY) fall in net profits to Rs 4,236 crore during the January-March quarter of 2012. While revenues grew by 17 per cent (YoY) to Rs 85,182 crore, the sharp fall in net profits can be majorly attributed to the fall in performance of its three main business segments – refining, petrochemicals and oil & gas exploration.

While the company’s oil & gas business continues to disappoint as its segmental revenues and earnings before interest and tax (EBIT) fell sharply by 37 per cent and 39 per cent on yearly basis, the other two segments viz. refining and petrochemicals have also come under some pressure over the past few quarters.

Despite achieving its highest ever level of crude throughput and running its refineries at utilisation rates of 109 per cent as against refinery utilisations rates of 83 per cent in North America and 76 per cent in Europe, RIL saw its refining EBIT fall by 32 per cent to Rs 1,696 crore. However, on a sequential basis the refining segment has shown some signs of bouncing back. It was surprising to see RIL’s gross refining margins (GRMs) increase to USD 7.6 per barrel from USD 6.8 per barrel in the December 2011 quarter. This sequential improvement in GRMs was primarily led by a strong jump in gasoline margins, higher netbacks due to switch from winter grade to higher value summer grade and the peak maintenance of the Asian refiners.

The petrochemicals business too had a ditto performance as the refining business. While revenues from petchem increased as a result of higher production volumes coupled with price hikes, the profitability on a yearly basis came under pressure. The EBIT margins have, however, fallen significantly by 420 bps to 10.2 per cent in from 14.4 per cent last year.

For FY12, the topline has increased by 31 per cent to Rs 3,39,792 crore and the bottomline has contracted by 1.2 per cent to Rs 20,040 crore. Talk on the streets suggest that state PSU ONGC would topple RIL from India’s largest profit making company as the government-owned oil & gas major is expected to surpass RIL’s FY12 profits.

In conclusion, we at DSIJ do not read much into these numbers as most of the negative sentiments surrounding the results were discounted prior to the results’ announcement. The stock has also closed the day marginally higher by 0.64 per cent at Rs 736.1 a share. While the oil & gas and petchem business do not show any near-term signs of revival, the positive turnaround in the GRMs has thrown some positive light in the flagship refining business. However, the actual improvement in the refining business would entirely depend upon recovery in global growth and meaningful closures on refineries in EU and NA, leading to higher utilisation rates for RIL.

Some other concerns that continue to lurk over RIL is the rising ‘other income’ component which currently contributes 54 per cent to the net profits as seen in the March quarter results. Its time the company deploys this cash into the business and creates some new alpha for the shareholders.