Write-offs, Volume Fall Hit Margin; GAIL Pins Hopes on New Terminals

Public sector GAIL’s results for the quarter to September are a reflection of the woes faced by the domestic natural gas transmission industry.
First, the dwindling availability of natural gas lowered the company’s transmission volumes, and, secondly, the changes in tariff regulations forced it to de-recognise a part of its revenue. Besides, being a state-run company, its subsidy sharing continued to add burden to its profitability. Although the company continues to invest in expanding its pipeline network, an improvement in availability of natural gas and stability in the tariff regime will be key to better financials as well as performance on the bourses.
GAIL’s transmission volumes dropped nearly 11% to 105.6 million units per day from 118.6 million units in the last September quarter. This was also 3.8% lower compared to the preceding June quarter. Still, revenues from the natural gas transmission business were at par with the yearago period, while profits improved 8.7% to . 604.9 crore owing to better margins.
The natural gas trading business was also hit as volumes dropped 3.5% to 80.7 million units daily. With a drop in profit margins, the segment’s profits fell 14.6% against a year ago. The LPG transmission business took a major hit when the regulator, Petroleum and Natural Gas Regulatory Board (PNGRB), revised tariffs relating to the company’s LPG pipeline, which forced it to write off . 123 crore of revenues. As a result, the segment posted a loss of . 48.9 crore, while it had posted a profit of . 72.2 crore a year ago. The company also wrote off a provisional . 785.7 crore towards LPG subsidy, which was 38.6% higher against a year ago. GAIL’s petrochemical business also underperformed with a flattish performance at the profitability level. As for the positives, the company’s other income more than doubled to . 236.8 crore thanks to a 43% jump in its cash balance to . 1,335 crore. However, this is likely to be temporary as GAIL is in the midst of a heavy investment phase and its cash balances will soon get utilised. Its borrowings at the end of September too rose 35.8% from a year ago and the interest cost on these funds will start reflecting once the projects get commissioned. It will take the commissioning of Petronet LNG’s Kochi terminal and the revival of GAIL’s Dabhol terminal to address the industry’s woes relating to falling natural gas availability. On the other hand, PNGRB and city gas firm Indraprastha Gas are locked in a legal tussle in the Supreme Court over tariffs. This means the sector’s problems will continue for a while.

Investors Pin Hopes on Cairn’s Maiden Dividend

Cairn India’s numbers for the quarter to September were in line with market expectations. Investors will now focus on the maiden dividend the exploration firm will announce on October 31.
The company’s ability to secure government approvals to raise production will be the key for it to improve its market value over the next few years.
The company, in its dividend policy announced earlier this year, had indicated a minimum 20% payout ratio — which would mean at least 20% of book profits to be distributed as dividend every year. If the profits of FY12 are taken into account, the dividend would work out to Rs 8 per share, which, according to some experts, will be the minimum the company will announce. However, if the company decides to reward shareholders more generously, it can dig into its cash pile of Rs 12,443 crore — or Rs 65 per share on its books. No wonder, shareholders are eagerly awaiting the announcement on the pay-out ratio.
Cairn’s production for the September quarter at 1,29,431 barrels of oil equivalent daily was 2% higher than in June quarter, but average realisations were down 2.6% to $96.7 per barrel. This resulted in a flat turnover at Rs 4,443 crore quarter on quarter. But, year on year, the turnover was up 67% thanks to growing production. The company had written off one-time expenditure of Rs 1,355 crore on the prior period royalty and cess in the September quarter in 2011. That is why its net profit for this quarter was expected to be significantly higher on y-o-y basis.
The profit figure should have been in line with the June quarter but for the forex loss of Rs 786 crore. Cairn India’s future growth will hinge on how swiftly it can ramp up its production further from its Rajasthan asset, for which timely government approvals will be critical. The company’s pilot project of Enhanced Oil Recovery, or EOR, through polymer flooding is progressing well and it has submitted a field development plan, or FDP, for a full field application of this technique.
The company also plans to invest $2 billion in two years in the Rajasthan field subject to government approvals, and it envisages a possible peak production rate of 3,00,000 barrels daily.

PSU Stocks as Wealth Creators

India’s second largest oil marketing company BPCL has been reeling under the pressure of under-recoveries just like its peers Indian Oil and HPCL. But the company has had success in its petroleum exploration ventures. The most prolific discovery was made in a block offshore of Mozambique where huge natural gas deposits were discovered. BPCL’s 10% stake in the block would entitle it to between 3 and 6 trillion cubic feet of gas at current estimates, which is today worth over $2 billion or more than 40% of BPCL’s current market capitalization. Similarly, the company’s consortiums have made multiple hydrocarbon discoveries in offshore Brazil, Indonesia and Australia as well as in the Cauvery basin. However, these discoveries are in preliminary phases and are being evaluated, which means they are still 4-5 years away from production. Nevertheless, their magnitude is huge when compared to BPCL’s size today. By 2017-18 when the revenues from these assets start flowing, they could contribute the biggest chunk in the company’s total profits. The company’s dependency on government for its profitability would then recede substantially.

Other Income, Refining Power RIL’s Return to Billion-$ Club

But worries remain as petrochem segment hits a new low and oil & gas continues to decline

    Reliance Industries (RIL) once again posted a net profit of over $1 billion in a single quarter (July-September 2012) after a gap of three consecutive quarters. However, this is unlikely to impress investors as its petrochemical business dropped to a new low, while a large chunk of its profits came from other income.
If the global economic weakness results in a slump in refining margins as well, the company could find it difficult to repeat its performance in the next couple of quarters.
“Maintaining similar profitability in coming quarters appears challenging for Reliance Industries given the macro-economic trends that would put pressure on refining margins as well as on petrochemical segments,” said Sandeep Randery, head of research with BRICS Securities. A Morgan Stanley report on Reliance Industries last week cited expectations of a weaker margin environment in refining and a subdued outlook on petrochemicals as key factors before turning cautious on the company and downgrading it from ‘Equal-weight’ to ‘Underweight’.
Petroleum refining was the sole driver of profitability in this quarter. The segment reported gross refining margin (GRM) — the differential between the cost of a barrel of crude oil and realisation from sale of refined products produced from it — at $9.5 per barrel.
This was the best number in the last four quarters. But, it was lower compared with $10.1 it had reported in the September quarter of 2011. This coupled with high operating rates boosted profits from this segment to the highest ever. 
On the other hand, the petrochemicals segment that has been under a lot of pressure for a prolonged time witnessed its profit margins dip to the historically lowest level of 7.9%.
The segment’s profit at . 1,740 crore was the lowest in the last three years. The sector’s woes, however, are unlikely to get over in a while.
The third key segment of oil and gas production continued to drift lower with dwindling gas production from the KG basin. Its profits for the September 2012 quarter, too, were the lowest in three years. Unless the company goes ahead with a further capex in this field, profits are expected to continue declining.
In this scenario, the company’s growing cash balances have come to its rescue, as other income contributed 31% of its pre-tax profits. This maybe a good thing for maintaining profits at decent levels and reflects the debt-free, cash-rich balance sheet. 
    But the same cash reserve is a drag when it comes to company’s capital efficiency.
The above mentioned Morgan Stanley report had also pointed out the ‘increased risk of investments into the low-RoE businesses,’ as one of the reasons behind downgrading it.
It is, therefore, more likely that the street would treat RIL’s results as a nonevent. The scrip will continue to take cues from developments in the global economics and Indian regulatory environment — issues like KG basin capex and natural gas price revisions post 2014.

Other Income, Refining Power RIL’s Return to Billion-$ Club

But worries remain as petrochem segment hits a new low and oil & gas continues to decline

    Reliance Industries (RIL) once again posted a net profit of over $1 billion in a single quarter (July-September 2012) after a gap of three consecutive quarters. However, this is unlikely to impress investors as its petrochemical business dropped to a new low, while a large chunk of its profits came from other income.
If the global economic weakness results in a slump in refining margins as well, the company could find it difficult to repeat its performance in the next couple of quarters.
“Maintaining similar profitability in coming quarters appears challenging for Reliance Industries given the macro-economic trends that would put pressure on refining margins as well as on petrochemical segments,” said Sandeep Randery, head of research with BRICS Securities. A Morgan Stanley report on Reliance Industries last week cited expectations of a weaker margin environment in refining and a subdued outlook on petrochemicals as key factors before turning cautious on the company and downgrading it from ‘Equal-weight’ to ‘Underweight’.
Petroleum refining was the sole driver of profitability in this quarter. The segment reported gross refining margin (GRM) — the differential between the cost of a barrel of crude oil and realisation from sale of refined products produced from it — at $9.5 per barrel.
This was the best number in the last four quarters. But, it was lower compared with $10.1 it had reported in the September quarter of 2011. This coupled with high operating rates boosted profits from this segment to the highest ever. 
On the other hand, the petrochemicals segment that has been under a lot of pressure for a prolonged time witnessed its profit margins dip to the historically lowest level of 7.9%.
The segment’s profit at . 1,740 crore was the lowest in the last three years. The sector’s woes, however, are unlikely to get over in a while.
The third key segment of oil and gas production continued to drift lower with dwindling gas production from the KG basin. Its profits for the September 2012 quarter, too, were the lowest in three years. Unless the company goes ahead with a further capex in this field, profits are expected to continue declining.
In this scenario, the company’s growing cash balances have come to its rescue, as other income contributed 31% of its pre-tax profits. This maybe a good thing for maintaining profits at decent levels and reflects the debt-free, cash-rich balance sheet. 
    But the same cash reserve is a drag when it comes to company’s capital efficiency.
The above mentioned Morgan Stanley report had also pointed out the ‘increased risk of investments into the low-RoE businesses,’ as one of the reasons behind downgrading it.
It is, therefore, more likely that the street would treat RIL’s results as a nonevent. The scrip will continue to take cues from developments in the global economics and Indian regulatory environment — issues like KG basin capex and natural gas price revisions post 2014.

Other Income, Refining Biz may Boost RIL’s Net

Petrochem, E&P segments could weigh heavy in the Sept quarter, feel analysts

    As Reliance Industries (RIL) readies to publish its results for the July-September 2012 quarter on Monday, analysts expect the company’s performance to be better sequentially, but lower compared to the year-ago level. The refining segment and other income are likely to boost profitability, but the petrochemicals and E&P segments are likely to weigh heavy on the company’s performance in the September quarter. The aggregate net profit of the energy behemoth is estimated between . 5,317 crore and . 5,550 crore for the September quarter, which will be significantly better than the . 4,473-crore profit posted in the June 2012 quarter. However, compared to the net profit of . 5,703 crore in the September 2011 quarter, RIL is likely to see a 2.5% to 7% fall. 
Gross refining margins (GRM) — the difference between the cost of a barrel of crude oil and the price at which the processed output can be sold — have improved during the September 2012 quarter from previous three quarters. According to a DSP Merrill Lynch report, the September 2012 quarter Reuters’ Singapore complex GRM at $9.13 per barrel was flat against the year-agoperiod, but up 37% from $6.65 of the June 2012 quarter. RIL, which is known to report GRM marginally above the Reuter’s Singapore benchmark, should post between $9 and $9.5, according to majority of brokerage analysts. This will be lower compared to the $10.1 it posted in September 2011 quarter, but higher than the $7.6 of June 2012 quarter.
The company’s KG basin output is expected to average 29 mmscmd during the quarter from 32.1 mmscmd in the previous quarter. Similarly, the petrochemical segment’s profitability is likely to remain under pressure. “Average prices of petrochemical products remained flat on a sequential basis during September 2012 quarter in rupee terms, as an increase in crude oil prices was offset by lower demand for petrochemicals,” noted Angel Broking’s preview report. This is expected to result in a weaker operating profit for the quarter compared to the corresponding period of the previous year. However, a spurt in other income, thanks to growing cash reserves of the company, will limit the fall in profit. Bank of America Merrill Lynch expects an 81% jump in other income, which was . 1,102 crore in the year-ago period. Similarly, it expects a fall in effective rate of tax to 18% of pre-tax profits from 22% in the year-ago period to further cushion the fall in net profit.

Lower Margins, Payment Delays may Bog Down Sintex

After four consecutive quarters of yo-y profit fall, the 86.7% jump in Sintex Industries’ September quarter net profit was something that might have rekindled hopes of a turnaround for the company’s investors. This was reflected in the 5.7% jump in its share price with strong spurt in volumes post results. However, the scenario is not so clear. The company’s challenges persist and it still appears a few quarters away from a real turnaround.
The main reason behind Sintex’s profit jump was a 92% reduction in its forex losses to . 4.9 crore that boosted its pre-tax profits by . 55 crore compared with the year-ago period. Excluding this, the pre-tax profits at . 102.7 crore were down 18%. This was a reflection of the persisting weakness in the company’s operating performance, particularly with the September 2012 quarter operating profit margins weakening to 11% from 13.8% in the year-ago period.
The monolithic construction business, which till last year was the single largest segment, has been facing delays in payments from state governments. This has resulted in a long debtor recovery cycle and a stretched balance sheet. The September ’12 quarter results didn’t offer any positive cue in this regard as well. “The company’s working capital cycle, currently at 47% of annualised sales, has neither improved nor worsened from the last quarter. So, the company is just stabilising and no improvement is in sight just yet,” noted Jignesh Kamani, research analyst with brokerage firm Nirmal Bang.
Even the company acknowledges that the things are yet to turn around. The comments by Amit Patel, managing director of the company, accompanying the results press release, mentioned a time frame of “next couple of years” to achieve key financial targets and for bouncing back.
These key financial targets include improving return ratios, ensuring better working capital management and shrinking the overall size of the balance sheet. 

PETROLEUM SECTOR: Strong Re, Better Refining Margins to Prop Up Cos in Q2

Indian petroleum industry’s performance in the September 2012 quarter is likely to be better than in the June 2012 quarter, thanks to a stronger rupee, higher refinery margins and reduced under-recoveries.
However, compared with the year-ago period, the results would appear subdued. Again, the profitability of petroleum PSUs remains dependent on the government’s subsidy-sharing plan.
Crude oil prices, which had dropped to below $90 a barrel in the second half of June 2012, gained steadily to cross $115 by mid-September — the prices marginally eased later. The Indian basket of crude oil averaged $107 per barrel in the September quarter, which was on a par with the preceding quarter.
Nevertheless, the daily under-recovery figures given by the Petroleum Planning & Analysis Cell (PPAC) show that the industry’s daily under-recovery fell to . 430 crore in the September quarter from . 510 crore in the June quarter. This hints at a reduced under-recovery burden for the quarter.
The rupee dropped to a fivemonth low of 52.7 against the dollar at the end of September. Apart from reducing India’s crude import cost, it will enable companies, which were booking forex losses in the June quarter, to book forex profits now. Stateowned oil marketing companies will particularly benefit from this.
Gross refining margins (GRM) were steadily growing through the September 2012 quarter. A recent report by Bank of America Merrill Lynch acknowledged that in the September quarter, the benchmark Singapore refining margins, on average, had reached their highest level in four quarters. This will help standalone refiners, including MRPL, Essar Oil and particularly Reliance Industries. The benchmark refining margins are still lower than the year-ago levels.
“We expect RIL’s GRMs to be up 15% Q-o-Q, but down 10% Y-o-Y at $9 per barrel. The average gas production from KG-D6 will decline 8% Q-o-Q and 34% Y-o-Y to 30 mmscmd and other income will rise 50% Y-o-Y to . 1,650 crore. We estimate its net profit to increase 19% Q-o-Q, but decline 6.5% Y-o-Y to . 5,320 crore,” says a BRICS Securities note.
Most petroleum companies are expected to follow this trend and post better results in the September quarter, compared with the June quarter, but weak compared with the year-ago quarter.
However, Cairn India could be a major exception. The company had booked onetime expenses of over . 2,500 crore in the September 2011 quarter. Further, the company’s production has improved 33% to 1,31,000 barrels per day from the year-ago levels.
When it comes to the performance of the three oil marketing companies, everything would depend on the government’s ability and willingness to compensate them for the under-recoveries.
The trio had reported record losses in the June 2012 quarter when there was no compensation from the government. 
KEY POINTS The rupee dropped to a five-month low of 52.7 against the dollar at the end of September. This will reduce oil import cost
Daily under-recoveries of the industry have fallen to . 430 crore in the September quarter from . 510 crore in the June quarter
Gross refining margins were steadily growing through the September 2012 quarter. This will help oil refiners