RELIANCE: Petrochem,oil & gas are the ones to watch out

DESPITE doubling the refinery capacity and commissioning of natural gas production, India’s largest private sector company Reliance Industries posted a 6% dip in its net profit to Rs 3,852 crore in the September 2009 quarter. However, the new businesses took the company’s gross profit and pre-tax profit to their highest-ever levels, only to be hampered by a rise in depreciation due to new projects going live and MAT-induced tax.
Although its refinery throughput nearly doubled over the yearago period, the profits from refining halved, denting the company’s bottomline, which could not be repaired by higher margins in the petrochemical business and doubling of oil & gas profits. Global oversupply of refined products on the one hand and a crash in the differential between best and worst quality crude oils resulted in pressure on RIL’s refining margins. RIL’s refineries are better-equipped to process the worst quality crude oil, which have traditionally been available at a significant discount to the best quality ones, thereby earning a better margin compared to peers. RIL’s gross refining margins (GRM) dipped to $6 per barrel, the lowest in at least five years.
The company’s petrochemicals business, however, did much better against the market expectations, showing margin growth and recording its highest-ever quarterly profit in history at Rs 2,195 crore. Strong domestic demand and an 11% depreciation in rupee value against the year-ago period helped the company improve its realisations. RIL’s sales from petrochemicals business fell 14% despite a 8% y-o-y growth in volumes due to overall lower prices.
The oil & gas segment of the company, which is fast gaining prominence with growing gas volumes from KG basin fields, reported a three-fold rise in sales. Still, an erosion in margin resulted in restricting the profit growth at 90% y-o-y at Rs 1,226 crore.
Going forward, the ramping up of KG basin gas will keep propping up the company’s profitability while the refining business continues to suffer. The petrochemical business, too, is likely to witness increasing margin pressure over the next 2-3 quarters. However, the company would be able to reap full benefits of its expanded capacities once these cyclical businesses see an upturn.