RELIANCE INDUSTRIES: Strong Refining Margin Plays Saviour, but this Show’s Unlikely to Go on

Reliance Industries has managed well to meet the market’s expectations as strong growth in its refining business outweighed the weakness in petrochemicals and oil & gas segments. Although the results were the company’s best ever in any single quarter, its sustenance in the coming quarters is doubtful.
RIL’s gross-refining margin for the June ’11 quarter rose to double digits for the first time after the December 2008 quarter — a gap of more than two years. This was made possible by the unusually high differential between sweet and sour qualities of crude oil and high gasoline prices. However, in view of rising refining operations, globally, the situation is not expected to continue in the next quarter.
The drop in margins of its petrochemicals division was alarming. At 12.2% of net sales, profit margins were the lowest in the past two years. Still, the company managed to post a 7.9% YoY growth in profits of this segment, thanks to a double-digit volume growth. However, a large part of this volume growth was due to lower production in the year-ago period due to maintenance shutdowns. Going forward, as the benefit of low base vanishes and margins remain stagnant, the company could see a fall in profitability of this segment.
The natural gas production from KG basin dropped to around 48 million cubic meters per day during the June 2011 quarter, which was down 18% against year-ago period. This was somewhat lower to the 49 MMSCMD estimated by most of the analysts, and is not expected to improve in foreseeable future. The company, which grew its net profits by a strong 24.9% in FY11 YoY, has seen its growth rate drop lower quarter after quarter. The average profit growth, which stood at 30% in the first half of FY11, came down to 20% in the second half. For the first quarter of FY12, it stood at 16.7%. This trend will continue in the coming quarters.
It is expected that the performance of RIL’s refining division, which played the role of saviour of the June 2011 quarter, will stagnate in the second half of 2011. During the September 2011 quarter, the company has planned a maintenance shutdown, which will lower its volumes. The woes of its other two businesses are yet to be over. These expected trends cast doubts over RIL’s ability to maintain its bottomline in quarters to come.