GRMs crash to $6.8/bbl, polymer spreads shrink, KG-D6 output continues to fall.
Over the last one month, brokerages have been marketing Reliance Industries (RIL) as a good buy, as the valuations looked attractive and there were signs of an uptick in refining margins. Over a year, RIL has fallen 18.19 per cent compared to a 12.12 per cent fall in the Sensex. In this context, its third quarter results and the subsequent announcement on its Rs 10,440-crore buyback programme indicate that the fourth quarter is likely to be challenging as well. Also, the company has announced that one crude distillation unit at its Jamnagar complex will remain shut for three weeks in February for maintenance.
Analysts say the company’s third quarter numbers indicate weakness across business segments. For starters, they say the net profit for the December quarter at Rs 4,440 crore is below consensus estimates of Rs 4,500 crore. Sequentially, this is a 22.15 per cent decline from Rs 5,703 in the September quarter. The operating profit before other income and depreciation declined 4.3 per cent in the first nine months of FY12, from Rs 28,283 crore to Rs 27,055 crore. “Net operating margin was lower at 10.7 per cent as compared to 15.4 per cent in the corresponding period of the previous year due to the base effect and reduction in higher margin E&P operating profit arising out of lower production and due to transfer of 30 per cent participating Interest (PI) in KG-D6 to BP,” says a company statement.
Over the last couple of quarters, the gross refining margins have been coming down. Earlier, the GRMs commanded a premium to the Singapore complex GRMs. This quarter, the company’s GRMs are down to $6.8 per barrel, down from the nine-month average of $9/bbl. Analysts say that the main reason behind this contraction is the narrowing of price differential between sweet and sour crude. So far, RIL has benefited as it uses sour crude, which historically has traded at a discount to sweet crude, processed by some other global refineries. This helped shore up the company’s margins. However, as the price differential has narrowed, margins have come off. The company says: “On a quarter-on-quarter basis, RIL’s GRMs were lower at $6.8/bbl, primarily due to weaker product cracks but also due to the impact of higher crude costs and reduced Arab light-heavy differentials.” Also, the weakness in European markets and change in product mix has also affected margins negatively.
The petrochemical business, too, has come under stress due to weakening spreads in the polymer segment. Analysts say while the prices of raw materials have gone up, the selling price of finished products have not moved in line, therefore, impacting margins here, too. Apart from weak GRMs, the company has also booked foreign exchange losses to the tune of Rs 1,500 crore. All these factors have hit the third quarter beat, claim analysts. The steady fall in gas output from the KG-D6 basin will also continue to hit the performance.
For the first nine months of FY12, production from KG-D6 was 3.87 million barrels of crude oil, and 436.40 billion cubic feet (BCF) of natural gas, reduction of 39.8 per cent and 21.9 per cent, respectively, as compared to the corresponding period in the previous year. Production for this quarter was 136 BCF as compared to 147 BCF in the previous quarter. Analysts expect any revival in output only by 2014.
"Given that investment ideas are limited in this market, RIL’s valuation (P/E ratio of 11x forward earnings) make the stock attractive," says one analyst.