RIL to report flat profit growth on lower GRMs

Earnings to fall 4% sequentially on lower margins, gas output

The June quarter has been volatile for the oil and gas sector, with sharp crude oil and currency movements. So, no fireworks are expected from Reliance Industries (RIL) this earnings season. The company, which is to report its first-quarter numbers on Saturday, is expected to report a flat growth in profit year-on-year (y-o-y) due to a decline in product spreads. On a sequential basis, RIL is expected to report a 4.8 per cent decline in earnings, as gross refining margins (GRMs) are expected to be weaker, compared to the fourth quarter. Bank of America Merrill Lynch (BofA-ML) expects net profit to rise one per cent y-o-y but decline four per cent quarter-on-quarter at Rs 5,430 crore.

Analysts expect GRMs to decline sequentially, as the benchmark Singapore GRMs have dropped from $6.2 a barrel in the fourth quarter to $5.8 a barrel. Analysts claim the fuel oil and LPG cracks have declined during the quarter, which would be negative for refiners such as RIL.

  Emkay Global is factoring in lower GRMs at $8.9 a barrel during the June quarter compared to a GRM of $9.3 a barrel in the fourth quarter. However, in rupee terms, RIL's GRMs are expected to grow six per cent, y-o-y, due to a weak currency. BofA-ML expects RIL's earnings before interest and tax (Ebit) in the June quarter to be up 14 per cent, y-o-y, driven by a 19 per cent y-o-y rise in refining Ebit and six per cent y-o-y rise in petrochemical Ebit. RIL's first quarter refining Ebit rise would be driven by six per cent y-o-y rise in its GRM in rupee terms.

While refining margins are expected to decline sequentially in the June quarter, petrochemical margins are set for improvement on better demand, according to some analysts. There is no consensus on this either, as most analysts expect petchem margins to decline. Analysts are unanimous in the expectations of a further decline in gas production from the Krishna Godavari-D6 basin. Most analysts expect Reliance's gas output from KG-D6 to be at 13 mmscmd, from 13.6 mmscmd in the fourth quarter. Sharekhan's assumption includes a marginal contraction in the petrochemical margin of the company and gas output of 13 mmscmd from its KG D6 block. "We expect a flat growth to a decline in the earnings of RIL." Interestingly, the company's other income is also expected to decline during the quarter, believe analysts, which will not bump up post-tax profit.