Mukesh Ambani-led Reliance Industries Limited (RIL) has more or less met analysts’ expectations in the quarter as well as in full year ended March 2010. Net revenues more than doubled to Rs 57,570 crore year-on-year in March 2010 quarter, helped by all its businesses particularly improved scenario in refining and petrochemical businesses.
Consequent to rising oil prices amid improving global economic growth, refining margins rebounded after touching historical low levels in Q3FY10 on account of temporary shutdown of refining capacity (close to 2.5 per cent of global capacity) during the slowdown and delay in new capacity additions. Singapore Gross refining margins (GRMs) averaged at $5 per barrel, a quantum jump from its 8-year low level of $1.9 achieved in the previous quarter though it is still marginally down by 10 per cent.
RIL, which commands a premium of $3-4 per barrel over Singapore GRMs also showed a stark improvement and GRMs stood at $7.5 in the March quarter, up 27 per cent q-o-q though it is still down by 24 per cent on a yearly basis.
Besides higher GRMs, increased volumes with additional commissioned capacities of Jamnagar refinery and Reliance Petroleum helped boost refining revenues, which leaped 165 per cent. Even petrochemicals business showed improved performance helped by low inventory levels and rise in prices and margins of polymer and polyester products while exploration and production (E&P) revenues jumped six fold due to ramp up of KG D6 gas production.
Though topline has shown a quantum leap, profitability was muted both at operating and net level. Total expenditure rose 138 per cent as raw material (75 per cent of sales), jumped 146 per cent. Consequently, operating profit growth was half of topline growth at 60 per cent to Rs 9,136 crore. With commissioning of two new projects namely KG D6 and RPL, higher depreciation costs more than doubled and thus ate into the net profit growth, which stood at 30 per cent to Rs 4710 crore.
Margin pressure
Going ahead, some analysts are still not convinced about the sustainability of the strong rebound of refining and petrochemical margins. Says an oil and gas analyst from Motilal Oswal report in his Q4 preview report, “Though, in the short-term, GRMs could improve due to large scale maintenance shutdowns in Asia, we do not expect GRM to increase much in the medium term, and believe sustainability is largely dependent on world economic growth and permanent closure of refineries.”
He also expects petrochemical margins to be under pressure in the coming months due to substantial new capacity additions happening in Middle East and China thus leading to lower utilization levels. Rupee appreciation could further aggravate the pressure on margins.
Analysts expect stable GRM margins of about $8 per barrel for FY11. Outlook for E&P business is strong with further ramp up in production and new discoveries; however its contribution to financials is miniscule as of today and thus assumes less importance.
The company has been an underperformer for a prolonged time vis-à-vis Sensex thanks to gloomy scenario of its businesses, uncertainty over the outcome of RIL-RNRL gas dispute and its recent expensive acquisition attempts namely Netherlands-based Lyondell Basell Industries AF, and debt-strapped Value Creation Inc. of Canada.
At Rs 1087, the stock is still 13 per cent lower than its 52-week high levels though Sensex has already touched a 52-week high level of 18,047 and is down by just 2 per cent. However its recent joint venture with US-based Atlas Energy wherein it will acquire 40 per cent interest in the latter’s 300000 net acres of undeveloped shale gas assets for $2 billion (over next few years) is looked at positively by analysts as it will enable entry into the high potential US market.
Says Niraj Mansingka, analyst, Edelweis Capital, “We are positive on this acquisition as it enables RIL to find investment opportunities, enter the US market, operate the shale gas business and acquire further shale acreage in future.” Also, potential for acquiring good long term bets with the rich cash reserves ($14 billion over next two years) of the company and good amount of treasury stock backed by improving core business scenario, the stock provides various triggers going ahead and one of the best analysts’ picks in the oil and gas space.
At price to estimated earnings multiple of 15 times and 13 times for FY11 and FY12 does not look expensive for India’s biggest company by market capitalization.
