Fall in crude prices, weak refining margins to hurt RIL's Q2 results

Lower gross refining margins might offset good petchem show; net profit might grow 2-3%

The September quarter has been volatile for the oil and gas sector, as crude oil prices continued to decline. Lower crude oil prices are good for the government’s exchequer but not for complex refiners such as Reliance Industries. The company is expected to report a modest two or three per cent increase in its net profit year-on-year (y-o-y), driven by lower crude prices and weak refining margins. Though margins in the petrochemical business are expected to improve, weak performance of the refining segment would offset the gains, say analysts. Over several quarters, robust performance of the refining segment has driven earnings growth.

The September quarter is likely to see muted earnings growth, as all the key factors that impact refining margins had underperformed. Product cracks (differential between price of crude and petroleum products) declined. Brent crude dropped seven per cent y-o-y to average $102 a barrel, and the benchmark Singapore gross refining margin (GRM) fell 19 per cent sequentially to $4.7 a barrel. Also, the difference between light and heavy crude narrowed sequentially, which would impact the margins of complex refiners.

Given that the outlook on crude oil remains muted, analysts expect the Singapore GRMs to remain between $6 and $8 a barrel. Some believe the fall in RIL’s GRMs might not be as high as 20 per cent because it will continue to gain from the light-heavy differential. Antique Stock Broking is estimating RIL’s GRM to fall seven per cent quarter-on-quarter to $8.1 a barrel, against a 20 per cent drop in benchmark margins on favourable light-heavy spread.

  For Reliance, the issue of gas price increase also remains unresolved. While a segment of the Street is factoring in an increase from the second half of FY15, others believe an increase will be effective only from FY16. Though several brokerages are bullish on the stock, thanks to the massive $13-billion capital expenditure lined up to expand refining and petchem capacity, the company’s earnings cycle will only accelerate from FY17.

Motilal Oswal Securities has a neutral rating on the stock, as the next earnings growth phase is still some time away (FY17), when its new core business/exploration & production (E&P) projects get commissioned. HDFC Securities, on the other hand, believes the current price factors in most of the negatives related to the E&P business. The brokerage believes while FY15/16 should see the initial benefits of capacity adds in polyester and intermediates, FY17 could see a quantum shift.