Reliance Industries (RIL): RIL likely to post the best net growth in past 10 quarters

Volumes To Drive Bulk Of Co’s Profits, Tight Margins To Affect Refining Biz

THE country’s largest company by market capitalisation Reliance Industries (RIL) is expected to repeat its March 2010 quarter performance when it publishes its June 2010 quarter numbers on Tuesday. The numbers will, however, look fabulous against the lacklustre June 2009 numbers with the y-o-y net profit growth pegged between 29% and 34% by various brokerages. If the analyst expectations come true, RIL’s net profit growth will be the best in the past 10 quarters.

A bulk of the expected profit growth will be driven by volumes and margins are expected to remain under pressure for RIL. The company’s refining business, which contributed nearly 70% to its revenues and 30% to FY10 profits, is expected to suffer from the weakness in the gross refining margins (GRMs).

“The Singapore GRMs have averaged lower this quarter at $3.7 per barrel against $4.9 per barrel in Q4FY10. The refinery utilisations rates have improved in this quarter leading to a q-o-q drop in the Singapore complex GRMs,” noted Elara Securities. Even the most lenient predictions peg RIL’s June quarter GRM at $8 per barrel — only marginally better than $7.5 of the year ago period.

The petrochemicals business, representing less than one-fourth of the company’s revenues last year, is also expected to face margin pressure. “The prices of key polymer products witnessed a decline in the range of 3-4% on a sequential basis as compared to the 1.3% sequential decline recorded in the naptha prices,” mentioned Sharekhan’s results preview note.

The higher decline in the petroleum product prices compared to the drop in the raw material prices is expected to pull down the petrochemical margins. Considering the increased supply from petrochemical capacity additions in the Middle East and China, the margins are likely to remain under pressure.

The main booster to the company’s profits will come from E&P business, as the KG basin continues to produce at nearly 60 MMSCMD of natural gas and 30,000 barrels per day of oil. Despite predicting a strong double-digit profit growth, not all brokerages are positive on the company’s performance, going forward. “Our near-term view on the refining and petrochemical cycle is bearish and we believe this could adversely impact margins of RIL and other refiners,” mentioned Motilal Oswal’s results preview note.

The cyclical weakness in the global refining and petrochemicals industries had so far not touched RIL’s numbers due to its expanded capacities. The scaling up of its gas production also supported the bottomline as the times tunred difficult. However, going forward, the base effect will come into play and a pressure on margins could dampen its profit growth.