THE financial performance of Reliance Industries was more or less in line with street expectations as the company reported another billion dollar show in profits during a quarter.
RIL’s net profit for the quarter to June was 4,851 crore on net sales of 58,228 crore. The scrip, which ended flat at 1,053 on Tuesday before the results were announced, still trades above a price-to-earnings multiple (P/E) of 20, only marginally lower than the P/E of BSE Sensex. It, however, remains to be seen how the company maintains the momentum in the next couple of quarters, given the lack of excitement in the global business environment. RIL put to rest analysts’ worries of a sequential slowdown in its earnings. In all its business segments, the profit margins registered an improvement — albeit marginal — compared to the March 2010 quarter.
Against the year-ago period, the margin erosion was evident in the June ’10 quarter numbers. However, what the company lost out on margins, it made up with higher volumes. Its refining business posted a 4% profit margin against 5.3% in the year-ago period.
However, the segmental revenues more than doubled, lifting the earnings before interest and tax (EBIT) by 57%. Similarly, a 150% spurt in revenues from the oil & gas segment led to a 91% jump in its EBIT to 1,921 crore.
The petrochemicals segment, however, registered a 3% fall in EBIT as margins weakened by 320 bps despite a 19% sales growth. Growing production from the Middle East based on natural gas feedstock could put pressure on RIL’s margins in this business.
The main business of petroleum refining, too, is facing headwinds as the weakness in the global economy suppresses demand. Refineries across the globe are working at 80%-85% capacity utilisation levels to match demand. Against this backdrop, the freeing up of petrol prices locally bodes well for RIL, which is operating its refineries at more than 100% of their rated capacities.
As the two main businesses face margin challenges, a further scaling up of its oil & gas business will play a critical role in maintaining RIL’s growth momentum in the next couple of quarters. During the past two quarters, natural gas production from its KG basin fields has been stuck at 60 mmscmd while oil production was gradually raised to 30,000 barrels daily. In view of the limited ability of this business to scale up further in the near term, RIL is likely to post similar numbers in the next few quarters. They could translate in healthy YoY growth initially, but will taper off as the base effect comes into play.
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