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.