Reliance Industries: Better than Expected

THE refining business of Reliance Industries (RIL) took a third position in the pecking order for the first time in the company’s history, when profits from both petrochemicals and oil & gas businesses exceeded the refining profit. Incidentally, RIL’s both the refineries, which represent the world’s largest single-location petroleum refining complex with 1.44 million barrels per day, operated significantly above their rated capacities during the quarter.
Overall, the numbers are in line with market estimates, with the rising profit from the oil & gas segment offsetting the falling profit of the refining business. Globally, the refining business was severally under pressure in the December quarter with significantly lower margins due to high product inventories. RIL’s gross refining margin at $5.9 per barrel, although lower compared to $6 of September ‘09 and $10 of December 2008, was substantially better compared to the regional benchmarks.
During the quarter, the company ramped up its KG basin gas production to 60 MMSCMD and is ready to take it to the first plateau of 80 MMSCMD on signing offtake contracts. The first three quarters of FY10 have turned out extremely well for the company on all operational parameters with production of refineries, petrochemicals and oil & gas growing consistently. The cyclical downturn in the petroleum refining has been made up by higher volumes and the oil & gas business. The RIL scrip gained nearly 3% immediately after the results were announced to reach an intra-day high of Rs 1,070 on BSE, but closed slightly lower at Rs 1,050.70. For the trailing 12-month period, the company now has per-share earnings of Rs 46, which result in a P/E multiple of 22.8.
The benchmark gross refining margin has revived in January 2010 and is expected to improve further with global economic growth. This could bring about a major revival in the company’s refining profits in the coming quarters. Growing gas production will also augment revenues. At the same time, the large cash pile through sale of treasury shares could be an indicator of a likely acquisition in the near term. Although growth prospects are high, the current rich valuations appear to factor in most of it.