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Mukesh Ambani-promoted Reliance Industries Ltd’s (RIL’s) net profit in the January-March quarter increased 0.8 per cent on an annual basis to Rs 5,631 crore, the highest in a quarter in two years. While this was very close to the Street’s estimates of Rs 5,656 crore, what came as a surprise to many analysts was the company’s better-than-expected operational performance.
For the full 2013-14 financial year, RIL’s standalone net profit rose 4.7 per cent over that the previous year to Rs 21,984 crore. Its consolidated net profit, at Rs 22,493 crore, too, was very close to the consensus estimate of Rs 22,532 crore.
“The year 2013-14 was a satisfying one for RIL. The refining business delivered the highest-ever profits, with a sharp recovery in GRMs (gross refining margins) towards the end of the year. The petrochemical earnings grew sharply, with margin expansion across polymers and downstream polyester products,” said RIL Chairman & Managing Director Mukesh Ambani.
On the operational front, the company’s earnings before interest, taxes, depreciation and amortisation (Ebitda) of Rs 8,331 crore in the March quarter was better than the market’s expectation of Rs 8,005 crore. This was despite a fall in other income and a lower-than-expected contribution from the domestic gas business.
Religare Institutional Research’s Nitin Tiwari said the March quarter results were operationally very good, mainly because of the company’s strong performance in the refining segment.
While the refining business also benefited from currency movements, the company said its turnover increased primarily because of price variation supported by currency depreciation and its profit before interest, depreciation and taxes (PBIDT) increased on account of higher operating income from refining and petrochemicals business.
During the quarter, the rupee averaged 61.80 a dollar, compared with 54.20 in the year-ago period. The gains, however, were partly offset by lower oil & gas earnings.
On its refining business, the company said: “In addition to the market dynamics, RIL’s performance was driven by its operational excellence and well-executed strategies around crude oil sourcing and product placement. Continuing its emphasis on processing most advantageous crude oil varieties, RIL processed 10 new ones during the year, besides two new secondary feedstocks. The ability to operate at high utilisation levels and switch product slate to suit market conditions enabled the company to capture limited opportunities in the market.”
RIL’s GRM of $9.3 a barrel also surprised analysts. After GRM of $10.1 a barrel in the year-ago period, they expected it to be between $8.7 and $9 a barrel in the March quarter. They said better-than-expected margin was a result of higher gasoline, naphtha and liquefied petroleum gas (LPG) cracks, as well as an increase in light-heavy differentials.
GRM, a key indicator of profitability for refining companies, is the difference between the cost of processing crude oil and the selling price of finished petroleum products. For the full financial year, it was $8.1 a barrel for the company.
During 2013-14, the benchmark Singapore complex margin averaged $5.9 a barrel, compared with $7.7 a barrel the previous year. “Overall, compared with the previous year, the cracks environment remained supportive but marginally subdued,” RIL said in a press statement.
Ambani added the company continued to face technical challenges in growing domestic upstream production. The US shale gas business, though, was doing well and its contribution to RIL’s consolidated Ebitda rose to over 12 per cent in 2013-14 from about nine per cent a year earlier.
“The US shale gas business grew significantly during the year and has become a material contributor to our earnings. Retail business has turned around and is now India’s largest retail chain. We have also accelerated efforts to roll out our state-of-the-art 4G services across the country which will add an exciting new dimension to our consumer-facing service offering,” Ambani said.
Chief Financial Officer Alok Agarwal said the US Shale gas business would continue to be a focus area for the company.
In its presentation to analysts, RIL said its shale gas business achieved materiality in many respects during the year. The company’s production grew 36 per cent on a year-on-year basis, with a 1.5-fold increase in wells put on production. During the financial year, RIL’s revenue from shale gas rose 45 per cent to $893.3 million and Ebitda increased 37 per cent to $659.4 million.
The company said its audited proved reserves grew 43 per cent to 2.66 trillion cubic feet during the calendar year ended December 2013. Proved reserves, less than 30 per cent of total resource base, underscored significant development upside in joint ventures (JVs), it added.
RIL said though extreme cold weather and operational/midstream issues across JVs constrained production ramp-up, several value-enhancing strategies (like down-spacing, completion optimisation, etc) were being actively implemented to improve capital and operational efficiency.
The decline in other income during the March quarter could be attributed to a rise in capital expenditure of the core businesses. The net addition to fixed assets for the year ended March 31 was Rs 35,210 crore ($5.9 billion), including exchange-rate difference in capitalisation, according to the company.
Markets were closed on account of a public holiday on Friday. On Thursday, the company’s stock had risen 1.88 per cent over previous close on BSE to Rs 958.75. The benchmark Sensex had risen 1.58 per cent to 22,628.84. During the past year, RIL’s shares gained 23.85 per cent (20 per cent since March this year), while the Sensex has risen 20.81 per cent.
“The positive GRM is a big surprise. Operationally it is a strong quarter but given that the stock has run up significantly in the past month, we do not see a big impact in Monday’s trading session,” said the vice-president (research) at a broking firm who did not wish to be named.
Bloomberg’s consensus one-year target price of Rs 1,006.21, too, suggests the stock is moving towards its fair value, though analysts bullish in the counter see more upside.
For the March quarter, the company’s revenue from the oil & gas segment dropped 11.3 per cent on a year-on-year basis to Rs 1,417 crore. Analysts had expected this segment to be a little better, given a higher KG-D6 gas production of 13 million standard cubic metres a day (mscmd), against 12 mscmd a year earlier. There has been a drastic decline in production from this block, mainly due to geological complexity, natural output fall and higher-than-envisaged water ingress.
The company’s revenue from refining and marketing was up 12.5 per cent to Rs 87,624 crore, against Rs 77,872 crore in the year-ago period. The full-year revenue from this segment rose 8.4 per cent to Rs 361,970 crore.
RIL’s revenue for the quarter from its petrochemical business, at Rs 24,343 crore, was up 9.9 per cent on a year-on-year basis. Analysts had expected this segment to show weakness. The performance, however, was a little better than expectations.
In the March quarter, the company’s turnover was Rs 97,807 crore — 8.1 per cent lower on a sequential basis, but 12.9 per cent higher on a year-on-year basis. For the full year, the turnover was Rs 401,302 crore, up 8.1 per cent over Rs 371,119 crore the previous year. Higher prices accounted for 7.7 percentage points of revenue growth, while an increase in volumes accounted for 40 basis points.
Of its $12-13 billion planned capital expenditure on the petrochemical and refining business, RIL has so far spent around 30 per cent and plans to spend the rest in the next 18-24 months. It had cash and cash equivalents of Rs 88,190 crore ($14.7 billion) at the end of the year, while its outstanding debt stood at Rs 89,968 crore.
RESULTS IN NUMBERS
- Turnover for FY14 up 8.1% y-o-y to Rs 401,302 crore
- PBDIT up 2.7% to Rs 39,813 crore
- Net profit for the year up 4.7% to Rs 21,984 crore
- GRM of $8.1/bbl for the year and $9.3/bbl for the quarter
- Outstanding debt as on March 2014 Rs 89,968 crore against Rs 72,427 crore on March 2013
- Retail business turnover up 34% to Rs 14,496 crore
- US Shale gas business revenue at $893 million, up 45% and Ebidta at $659 million up 37%
