Tough Days ahead, but RIL can Count on its Strong Books
Sharp fall in profit reflects a trend of slow growth for the petrochem major, signalling bad days for shareholders
After seven consecutive quarters, the quarterly profit of Reliance Industries fell below the $1-billion mark after a 13.6% drop it reported in net profit at . 4,440 crore for the quarter to December 2011.
That RIL would report disappointing numbers was a given, but what surprised the Street was the sharp slide in profits. In the near term, what may prop up the stock could be the announcement of a buyback of shares.
The numbers that the refiner had reported in earlier quarters had reflected a trend of slowing growth, with the bottomline being supported, thanks to non-business or other income. Margin pressures accentuated in the December ’11 quarter in its two main businesses — petroleum refining and petrochemicals due to moderation in demand.
The petro-refining segment was the worst performer, with gross-refining margins at $6.8 per barrel — the lowest in two years. The segment’s profit margins more than halved to 2.2% and pre-interest-and-tax profit or PBIT dropped 30.8% to . 1,685 crore.
The oil & gas segment was the second-worst performer reporting a drop of 14% in profits, but that was due to a 32.2% fall in revenues due to a decline in production and a 30% stake sale to BP.
The petrochemicals segment’s profits fell least 11.2% to . 2,157 crore. However, the fall was restricted mainly due to the 23.9% jump in revenues as margins were down 430 basis points.
Other income contributed close to 30% of RIL’s pre-tax profit in the December quarter. This marked a new high in terms of the contribution of non-business income to the company’s profits in over a decade, if one excludes occasional extraordinary gains.
Viewed against this backdrop, the buyback announcement from the company could not have come at a more appropriate time. Firstly, the company is flush with cash — . 74,539 crore at end December 2011.
Secondly, the stock has underperformed the market over the past one year and would have continued to do so in the light of the latest results. Lastly, the outlook for the coming quarters hardly appears promising.
It is one thing that RIL’s December quarter numbers were bad. But the worry is that it could also signal a below-par show in the coming quarters, which could be bad news for its shareholders.
The company benefits from its world-class scale of operations, but at its core, remains a commodity business, which is susceptible to economic cycles. The company’s extra-strong balance sheet will surely be its biggest asset as it negotiates global economic pressures.
That RIL would report disappointing numbers was a given, but what surprised the Street was the sharp slide in profits. In the near term, what may prop up the stock could be the announcement of a buyback of shares.
The numbers that the refiner had reported in earlier quarters had reflected a trend of slowing growth, with the bottomline being supported, thanks to non-business or other income. Margin pressures accentuated in the December ’11 quarter in its two main businesses — petroleum refining and petrochemicals due to moderation in demand.
The petro-refining segment was the worst performer, with gross-refining margins at $6.8 per barrel — the lowest in two years. The segment’s profit margins more than halved to 2.2% and pre-interest-and-tax profit or PBIT dropped 30.8% to . 1,685 crore.
The oil & gas segment was the second-worst performer reporting a drop of 14% in profits, but that was due to a 32.2% fall in revenues due to a decline in production and a 30% stake sale to BP.
The petrochemicals segment’s profits fell least 11.2% to . 2,157 crore. However, the fall was restricted mainly due to the 23.9% jump in revenues as margins were down 430 basis points.
Other income contributed close to 30% of RIL’s pre-tax profit in the December quarter. This marked a new high in terms of the contribution of non-business income to the company’s profits in over a decade, if one excludes occasional extraordinary gains.
Viewed against this backdrop, the buyback announcement from the company could not have come at a more appropriate time. Firstly, the company is flush with cash — . 74,539 crore at end December 2011.
Secondly, the stock has underperformed the market over the past one year and would have continued to do so in the light of the latest results. Lastly, the outlook for the coming quarters hardly appears promising.
It is one thing that RIL’s December quarter numbers were bad. But the worry is that it could also signal a below-par show in the coming quarters, which could be bad news for its shareholders.
The company benefits from its world-class scale of operations, but at its core, remains a commodity business, which is susceptible to economic cycles. The company’s extra-strong balance sheet will surely be its biggest asset as it negotiates global economic pressures.
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