After some very difficult quarters, Reliance Industries Ltd (RIL) is showing signs of revival in its core businesses. While some segments continue to suffer due to sluggish growth, overall growth in sales and profit suggests that a revival could well be underway. The company has not only positively surprised the Street with its profit after tax (PAT) growth, but even on the margin front. Though it’s down 5.7 per cent year-on-year, PAT has moved up 20.2 per cent sequentially to Rs 5,370 crore in Q2, suggesting traction in its core businesses.
RIL’s profit beat in Q2 have been driven by three main factors. Interestingly, it’s not only other income. Higher gross refining margins (GRMs) and a weak rupee have come to its rescue in Q2. Of course, other income continues to be a big factor in RIL’s net profit.
Refining has emerged as a star performer in Q2 due to tightness across markets. GRMs have moved up sharply — from $7.6/barrel in Q1FY13 to $9.5/barrel.in the quarter — due to major outages in Japan, Taiwan and China, explain analysts.
During the first half of the year, RIL processed 34.9 million tonnes of crude oil, achieving a utilisation rate of 112 per cent. During this period, utilisation levels were 84.8 per cent in North America, 78.5 per cent in Europe and 80.9 per cent in Asia. While analysts are not sure about the sustainability of such high GRMs, RIL believes the third quarter would be a strong one and, therefore, these GRMs would sustain as winter sets in this quarter, when demand remains strong.
The other indicator that all is not so bad are flat petchem margins. Given that the petchem cycle globally is showing weakness, RIL has managed to hold on to margins at 7.9 per cent compared to eight per cent in Q1FY13. This is a big positive as the market was expecting a decline of a further hundred basis points. This trend too, may sustain as demand from China is likely to pick up from January. The demand for petrochemical products typically slows down when there is a transition in China. However, this is expected to reverse by January. Also, the domestic market is showing strong growth, which would also help the company.
Going forward, exploration continues to be a big drag for the company. The volume at KG-D6 stands at 28.5 mmscmd compared to 32 mmscmd in the previous year. Analysts believe that though RIL’s core businesses are showing signs of revival, any upgrade would require traction in the E&P business.
