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.
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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.
Natural gas production from RIL’s D6 gas reservoir in the Krishna Godavari basin, off the eastern coast of India, is expected to remain stable at around 13 million standard cubic meters per day (mscmd), which means that the company’s oil and gas business isn’t expected to significantly contribute to its overall financials either.
Gas production at D6 has been progressively declining from D6 over the last three years, due to what the company terms as geological challenges. According to the original plan, gas output from this field, touted to be India’s largest gas find, was to reach a peak production of at least 60 mscmd by now.
Falling gas production has been a thorn in the flesh as far as RIL’s relationship with the oil ministry is concerned. Government agencies like the Comptroller and Auditor General have sought to investigate whether RIL has gold-plated the costs it has incurred in developing the D6 field; while the oil ministry has sought to disallow RIL from recovering its costs in developing D6 on the premise of gas production not being anywhere close to where it was supposed to be. RIL has also initiated arbitration against the government on this issue.
Meanwhile, RIL clarified in a statement to the bourses issued on Wednesday that the government has not levied a penalty of $579 million on the company. The $579 million is the proportion of cost recovery pertaining to RIL’s operations at D6 that the government has sought to disallow for FY14, RIL said.
The RIL scrip closed at R989.05 per share on the BSE on Wednesday, up 1.73%. The bourse’s benchmark index, Sensex gained 1.27% to end at 25,549.72 points.
Aveek Datta | The Financial Express