Q2 preview: Refining margins may pump up Reliance Industries earnings

With an improvement in refining margins, Reliance Industries (RIL) is expected to report a strong quarter for the July-September period. Analysts expect refining to offset weakness in petrochemicals (petchem) and a lower tax rate benefit for the retail and telecom businesses. 

RIL will report its financial performance for the September 2019 quarter on Friday.

In a Bloomberg poll, 10 analysts estimated RIL’s consolidated net profit at Rs 11,256 crore and nine analysts estimated revenue at Rs 1.5 trillion. Brokerages like Centrum see the highest-ever consolidated earnings prospect for the company. In the September 2018 quarter, RIL reported a consolidated net profit of Rs 9,516 crore. 

RIL’s refining business is expected to make a comeback in the September quarter, owing to higher margins. Analysts have pegged estimated gross refining margins (GRMs) in the range of $9.5 per barrel and $10.5 per barrel. This would be a turnaround from the $8.1 per barrel GRM reported in the June quarter, which was the lowest since October-December 2014.

“We expect September quarter GRMs at $9.5 per barrel, up from $8.1 per barrel during the June quarter, on the back of higher key product margins of diesel, gasoline, and jet fuel. The attack on Saudi Aramco oil processing facilities pushed gasoline margins to its highest level since 2018,” said analysts with BNP Paribas in their note. Analysts expect refining strength to offset petchem weakness.

While the petchem segment is expected to be weak, other businesses like retail and telecom are expected to show steady results. “ While the petchem environment has weakened, we believe RIL’s ability to switch feedstock to gas for as much as 60-70 per cent of its requirement should limit the petchem margin decline quarter-on-quarter (QoQ),” said analysts with JPMorgan. They added, “Retail should be another strong quarter, though year-on-year (YoY) growth rates should come off essentially on a higher base. We forecast Reliance Jio’s earnings before interest, tax, depreciation and amortisation at Rs 5,010 crore, up 7 per cent QoQ, driven by continued strong subscriber growth.”

The telecom and retail business is also expected to benefit from lower tax rates, according to analysts with Nomura. At the consolidated level, in the Bloomberg poll, only one brokerage shared a pre-tax profit estimate for RIL, which was at Rs 15,560 crore for the September 2019 quarter. In a Kotak brokerage report, analysts pegged estimated profit before tax at Rs 14,918 crore for the September quarter, compared to Rs 13,197 crore in the same quarter a year ago. 

Analysts with Bank of Baroda expect RIL’s retail earnings growth to witness slowdown, in line with macro trends across India. The brokerage estimated earnings before interest and tax at Rs 1,500 crore, a rise of 18 per cent YoY, but down 17 per cent sequentially.

In the post-results management guidance, analysts will look for further update on the company’s deleveraging plans. At RIL’s annual general meeting (AGM) in August, Group Chairman Mukesh Ambani announced plans to become zero net-debt company in 18 months. At the same AGM, Ambani also announced a proposed investment by Saudi Aramco in RIL’s oil-to-chemicals division. 

Analysts on Friday will look for more details on this proposed deal and a commentary on expectations with regard to the Indian Maritime Organization (IMO) regulations. 

The new IMO regulations require ships to use cleaner fuel starting January 2020, which are expected to improve the refining prospects for RIL.