Even as the company’s Q2 performance was in line with expectations, a likely decline in refining margins and lack of clarity on gas output and cash usage are key parameters to be monitored.
Despite posting its highest-ever quarterly net profit (Rs 5,703 crore), in line with expectations, Reliance Industries’ (RIL) stock fell almost four per cent on Monday to close at Rs 832. Part of the fall can be attributed to the recent run -up (up 13 per cent since October 5) in the share price, but there were negative surprises, too. Its gross refining margins, or GRMs, (which indicates the margin it makes for converting crude oil into different fuels) were robust at $10.1 a barrel, but the premiums over the benchmark Singapore GRMs was close to the lowest levels in the last six quarters.
Gas production at KG-D6 declined six per cent to 45.7 mscmd (which was largely anticipated), but the Street gave a thumbs–down to the lack of clarity regarding the company’s plans to ramp up production from the field. In fact, reports of the company planning to halt drilling of new wells and re-evaluate its E&P strategy suggest that it will be some time before a rampup in production happens and clarity emerges on the future of unexplored assets. The ramp up is being looked at eagerly as a growth driver by the Street, which believes that it would help offset any pressure in the refining segment — the current revenues are boosted by strong show of the refining segment, its margins could come under stress next year when new capacities in Asia go on stream.
| SUBDUED FY13 OUTLOOK | ||||
| in Rs crore | Q1' FY11 | Q2' FY11 | FY12E | FY13E |
| Net sales | 81,018 | 78,569 | 294,170 | 287,044 |
| % chg y-o-y | 39.1 | 36.7 | 18.5 | -2.4 |
| Ebitda | 9,926 | 9,844 | 40,273 | 42,379 |
| Ebitda (%) | 12.3 | 12.5 | 13.7 | 14.8 |
| Net profit | 5,661 | 5,703 | 23,463 | 25,589 |
| % chg y-o-y | 16.7 | 15.8 | 15.7 | 9.1 |
| EPS (Rs) | 17.3 | 17.4 | 71.7 | 78.0 |
| PE (x) | 48.2 | 47.9 | 11.6 | 10.7 |
| E: Estimates Source: CapitaLine, Bloomberg, Analyst reports | ||||
| DECLINING GRM PREMIUMS & GAS PRODUCTION | ||||||
| Q1FY11 | Q2FY11 | Q3FY11 | Q4FY11 | Q1FY12 | Q2FY12 | |
| Fx rate (Rs/$) | 45.7 | 46.5 | 44.8 | 45.3 | 44.5 | 45.4 |
| Reliance GRM ($ per barrel) | 7.3 | 7.9 | 9.0 | 9.2 | 10.3 | 10.1 |
| Singapore GRM ($ per barrel) | 3.7 | 4.2 | 5.5 | 7.4 | 8.5 | 9.2 |
| Premium to Singapore GRM ($ per barrel) | 3.6 | 3.7 | 3.5 | 1.8 | 1.8 | 0.9 |
| KG-D6 Production (mmscmd) | 59.1 | 57.9 | 55.8 | 51.0 | 48.6 | 45.7 |
| Source: Motilal Oswal Securities, company | ||||||
The stock has corrected more than 20 per cent since the start of the current fiscal. Analysts say the ramp-up at the Krishna Godavari (KG) D6 basin, clarity in refining outlook and utilisation of cash for organic/in-organic growth are key triggers for the stock and need to be watched.
REFINING BOOST
GRM’s reported for the September 2011 quarter at $10.1 a barrel, though higher on a year-on-year basis, were lower than estimates of $10.5 a barrel and even in comparison to the June 2011 quarter. What matters more is the narrowing gap between RIL’s GRMs and benchmark Singapore GRMs. RIL has typically enjoyed higher GRMs due to its complex refinery or its ability to process low-cost heavy variety of crude oil, helping earn higher margins. This premium in GRMs has been on a steady decline.
Jagannadham Thunuguntla Strategist & Head of Research, SMC Global Securities says reduced premium over Singapore GRMs is surely a matter for concern going forward, as it impacts the operational profit margins of the company. Refining business remains the largest segment for Reliance and contributed about 45 per cent to overall profits. Reliance processed 34.1 million tonnes of crude achieving an utilisation rate of 110 per cent, which also suggests that any significant increase in volumes looks unlikely. Moving forward, the robust GRMs that have been driving Reliance revenues now may come under pressure in FY13 if weak global oil demand coincides with the expected large global capacity additions. Positively, analysts at Bank of America- Merrill Lynch say if demand holds up and there are large refining capacity closures than expected, it could salvage the situation.
E&P UNCERTAINTIES
The gas output from KG-D6 has been falling continuously and fell six per cent sequentially to 45.7 mscmd. The market was disappointed with Reliance not giving any guidance and clearing uncertainty. Analysts at Edelweiss have now reduced their FY12 and FY13 gas production estimates to 45 and 42 mscmd against 47 and 46 mscmd projected earlier. With British Petroleum (BP) buying a stake in Reliance’s exploration and production (E&P) assets, some optimism is back as BP’s expertise can help resolve the output issues over the next two-three quarters — analysts says progress will come only after Reliance and BP revaluate together the E&P strategy.
WEAK PETCHEM MARGINS
The petrochemical segment (accounts for a third of profits) reported a strong 39.5 per cent year-on-year rise in revenues at Rs 21,066 crore led by robust domestic demand, as both polyester and polymer demand rose 21 per cent sequentially. However, the segment’s earnings before interest and tax grew by just 10.2 per cent (margins fell 310 basis points year-on-year to 11.5 per cent) on the back of new supplies from West Asia and slowdown in Chinese demand. Analysts say while volume growth should remain healthy, excess global capacity could keep margins under check in the near-term.
CASH USAGE
According to the CITI reports, after receiving the final tranche from BP on October 3, the total cash on Reliance’ books has increased to $15.6 billion from $12.6 billion at the end of the September quarter. With so much cash in hand, RIL benefitted in the September quarter by way of treasury income and a weak rupee. Other earnings jumped 64 per cent year-on-year to Rs 1,102 crore in the September quarter, excluding which, growth in pre-tax profit would have been just 13.5 per cent. The company typically earns single-digit returns (yield) on its surplus cash and investments, much lower than what the core businesses generate (over 16 per cent). How soon and how much of the surplus cash and investment can be deployed in core operations for better returns are among key triggers. Analyst at Angel Broking says: “RIL’s significant cash pile and treasury stocks could see it venturing into more inorganic avenues, which could provide upside triggers to the stock.”
