After a stellar performance in the last quarter of fiscal 2014, oil-to-yarn and retail conglomerate Reliance Industries (RIL) is expected to post a sequential decline in profitability for the quarter ended June 30, primarily due to weak refining margins.
The Bloomberg consensus of Mukesh Ambani-led RIL’s earnings estimates for the first quarter of FY15 pegs the company’s estimated net profit at Rs 5,434 crore, down 3.6% quarter-on-quarter and up by a marginal 1.5% over the corresponding period a year ago. The consensus estimates RIL’s revenues at R98,386 crore, up 3.35% over the January-March quarter, and 12.2% higher year-on-year.
Demand-side pressure on the margins of products like liquefied petroleum gas (LPG) and middle distillate products like diesel is expected to bring down the regional benchmark Singapore gross refining margin (GRM), as well RIL’s own GRM. Gross refining margin is the difference between the value of petroleum products sold and the cost of processing crude.
Middle distillate products like diesel and jet fuel comprise a significant portion of RIL’s product slate and a decline in the margins of these products amplifies the resultant impact on RIL’s refining business. It is for the same reason that the traditional premium that RIL’s GRM enjoys to the Singapore benchmark is also expected to have narrowed in the last quarter.
RIL’s GRM is expected to come down to $8.9 per barrel for the June quarter, down from $9.3 in the March quarter. “Singapore complex GRMs are estimated to have mildly declined by $0.4 per barrel quarter-on-quarter to $5.8,” a report dated July 7 by analyst Jal Irani of Edelweiss Securities says.
“RIL’s (GRM) have also declined marginally as it took an around 10-day shutdown of one of its two refineries.”
On the petrochemicals side as well, analysts expected RIL’s operating profit to decline quarter-on-quarter due to weaker polymer and polyester margins. A reported dated July 7 by brokerage Motilal Oswal expected RIL’s earnings before interest from the petrochemicals business to fall 5% sequentially. Another report dated July 7 by ICICI Securities states that margins of chemical products like PTA (Purified Terephthalic Acid) and MEG (Mono Ethylene Glycol) crashed by around 40% in the April-June quarter due to oversupply by China.
RIL, like other upstream oil and gas companies, is likely to receive some benefit from the recent surge in global prices of crude in wake of the geopolitical tension in Iraq. The benchmark Brent prices of crude have risen 2.2% sequentially and 8.2% over the year earlier during the June quarter to average $110 per barrel, according to the Edelweiss report. Some benefit of this rise in crude prices, however, has been negated for Indian companies due to the 3.2% quarter-on-quarter appreciation in the rupee versus the dollar.