RELIANCE INDUSTRIES: An Eventful FY11, But Margin Pressures Ahead

Reliance Industries signed off an eventful FY11 in style, as it posted a record quarterly net profit of . 5,376 crore in the March 2011 quarter.
The company’s net profit growth in the quarter slowed down to 14% Y-o-Y, from the average 30% in the first three quarters of FY11. The healthy growth during the whole financial year was mainly due to the increase in its overall volumes, thanks to the new refinery and KG basin gas, which were ramped up last year. The growth in the last quarter, however, was mainly due to higher oil prices and higher refining margins.
The company is unlikely to repeat its March 2011 quarter performance from the June quarter onwards, as all its three business verticals face headwinds. For the March ’11 quarter, the net-profit growth was mainly on account of the 26% jump in the refining segment’s profits at . 2,509 crore. Still, the $9.2 per barrel refining margin RIL reported for the quarter was much below market estimates, which averaged above $10.
The refining margins improved during the quarter due to factors like extended winter in some parts of the globe, supply disruptions in Libya and Japan, and shutting down of refineries for maintenance earlier in the year. But, from June quarter onwards, demand is expected to be low as more supply comes on stream. The company’s gas production is down to 52 million metric standard cubic metres per day (MMSCMD). The petrochemical segment is facing margin pressure due to capacities coming up in Middle East and China. Despite the strong margins in polypropylene, polyester and rubber segments during the March quarter, RIL could maintain margins only at the yearago level. In such a scenario, any slowdown in refinery margins could mean stagnancy in its quarterly profit growth.
In the March 2011 quarter, the company’s operating profit dropped 240 bps to 13.5%, mainly due to margin erosion in the oil & gas segment. For FY11, RIL’s turnover was up 29% at . 2,58,651 crore. The net profit was 25% higher at . 20,286 crore as against . 16,236 crore for the previous financial year. Ahead of the results, the stock was up 1.4% to . 1,040. The stock is unlikely to move up significantly till the company shows significant growth in its future earnings.