RIL feels refining margin pinch, may log lower net

ETIG Poll Sees Op Profit Fall 5.6%, But Treasury Share Sale To Boost Profit Nos

INDIA’S largest private sector company, Reliance Industries, is unlikely to post a growth in operational profits over a year-ago period when it publishes its quarterly numbers tomorrow (Thursday, October 29, 2009).
Commissioning of its two world-class projects — the 28-million tonne RPL refinery and KG-D6 natural gas — may not count much, as the company faces immense pressure on its refining margins. An ETIG poll of seven brokerage houses pegs the company’s net profit from operations to fall 5.6% y-o-y to Rs 3,889 crore. The one-time income earned on sale of treasury shares last month will, however, boost the company’s net profit number. Amitabh Chakraborty, president (equities), Religare Securities, said, “We are expecting 20% fall in RIL’s sales this quarter due to lower oil prices. It could see a slightly higher operating margin, thanks to a higher proportion of E&P profits. Still, gross refining margin (GRM) at $6.5 and lower petrochemical margins mean our net profit target is 7% lower y-o-y at Rs 3,827 crore.”
Sharekhan concurs: “RIL’s higher E&P profits and merger of RPL will get offset by lower GRM and marginal decline in petrochemicals margins.” It added that the interest and depreciation costs, too, would shoot up due to commissioning of the two mega projects. The global petroleum refining industry witnessed margin pressure, further worsening from preceding quarters in the September 2009 quarter. “Benchmark Singapore complex refining margin weakened to $3.3/bbl (-20% q-o-q; -44% y-o-y) led by weaker middle distillate cracks,” according to a results preview report by Motilal Oswal.
The pressure could push RIL’s refining margins to somewhere between $6.6 and $7.4 per barrel of crude oil processed — a historic low level. The refining business, which contributed more than half of the company’s consolidated profits in FY09, is likely to represent just around a quarter of its profits in the September 2009 quarter.
Still, some suspense hangs over the performance of the newlycommissioned refinery. The refinery enjoying a better configuration than RIL’s first refinery had earned a net profit of Rs 105 crore in the June 2009 quarter. Sandeep Randery, a research analyst with BRICS Capital, said, “The performance of the new refinery could be a surprise factor, when RIL publishes its September 2009 numbers. We don’t know what refining margins it will post.”
RIL’s petrochemical business, which contributed nearly half of the company’s June 2009 profits, is also likely to witness margin pressure. “We expect RIL’s petrochemical margins to decline marginally in polypropylene (PP). However, better integrated margins in polyethylene could offset some of the fall in the segment margins,” said Deepak Pareek, a research analyst with Angel Broking. BRICS’ Sandeep opined that the future may not be bright for this segment. “The petrochemical margins may remain flattish for the September quarter, but are likely to weaken going forward.”
The E&P segment will be the star performer for the quarter, which is expected to see its share in the company’s total profits soar from less than a quarter in the preceding quarter. The company’s natural gas production is likely to have crossed 30 million cubic metres per day (MCMD) from around 19 MCMD in June 2009 quarter. Going forward, the immediate future of the refining and petrochemical industries appears clouded with both industries facing overcapacity globally. Still not many analysts are bearish on Reliance Industries.