RIL’s Q2 net may not lift sentiments

RELIANCE Industries — India’s largest company by market capitalisation and one of the most widely held stock — is unlikely to liven up the market when it announces its second-quarter result on Thursday. RIL’s profit for the quarter is expected to grow only marginally, or even dip, compared with the year-ago period.
“Reliance has come out with steady results in volatile markets. However, RIL will struggle to touch two-digit profit figure this quarter because of the slowdown in refining margins. On the other hand, improved margins in petrochemical business could result in flat growth in net profit,” said an analyst working with a leading international brokerage. The petroleum refining industry has entered a slowdown phase globally, with the gross refining margins (GRM) — the differential between prices of crude oil and refined products — coming down from the previous quarter. Motilal Oswal in its Q2 earnings preview report said, “During the quarter ended September 2008, Singapore GRM at $5.4/bbl was down 15% against $6.4/bbl in Q2FY08 and down 33% compared with $8.1/bbl in the immediately preceding quarter.”

As a result, RIL’s petroleum refining business, which contributes nearly twothird to its revenues, is likely to record a lacklustre performance in the latest quarter. Analyst estimates put RIL’s GRMs in the $11-$13 per barrel range, weaker from $15.7 posted in June 2008 quarter and $13.7 in September 2007 quarter. This means its refining profits will be lower on a year-on-year basis.

In contrast, RIL’s petrochemicals business is expected to post healthy revenues and improved margins due to stagnancy in feedstock naphtha prices. Petrochemicals represent around 30% of RIL’s revenues and profits. The smaller segment of oil and gas production is also likely to perform well due to higher petroleum prices in the September 2008 quarter compared with the previous year. Weakness in the rupee is another factor that will impact RIL’s performance. Despite being India’s largest exporter, RIL has always had more imports than exports. Particularly, a major chunk of its petrochemicals is sold domestically within India. However, since the domestic petrochemical prices are linked to their import parity prices, RIL is likely to benefit from the weak rupee. “We expect RIL’s petrochemical EBIT to rise 5% y-o-y to Rs 2,130 crore mainly driven by a weaker rupee,” mentioned a Merrill Lynch report.

Brokerage houses are divided on RIL’s profit growth this quarter. Among them, Angel Broking is the most bearish on RIL, projecting a 13% fall in its Q2 profits. As against this, Motilal Oswal and Sharekhan are the most bullish, estimating around 9% rise in RIL’s profit. The estimates of other brokerages like Prabhudas Leeladhar, Merrill Lynch, Citi Investment are somewhere in between. The company is expected to post good profits in the coming quarters because of sale of oil & gas from the KG basin.

SLIPPING FORTUNES Slowdown in refining margins likely to hit RIL’s Q2 bottomline Broking houses divided over RIL’s financial performance Angel Broking is bearish, while Motilal Oswal, Sharekhan keep a bullish view