Reliance Industries’ refining division drives June quarter results

Oil & gas major Reliance Industries reported its June quarter results on Friday, 19 July 2013. Though its operating profit growth disappointed it could have been worse but for the refining business. The company’s net profit growth, however, was better than the Street’s expectation.

Key events that affected performance: One was the sharp depreciation in the rupee seen in the second half of the quarter. The rupee depreciated by 10% against the dollar in the June quarter. Second, its oil and gas output continued to slide, affecting both revenues and profits. Third, volume growth appears to have been affected by poor demand conditions in its refining division and even certain segments of petrochemicals. On the positive side, refining margins rose sequentially though they are down compared to the June 2012 period, partly due to better prices while a decline in crude oil prices played a role in giving it some cushion on the cost front.

The results: Reliance Industries’ sales declined by 4.6% to Rs 87,645 crore over a year ago but rose by 4.1% on a sequential basis (compared to the March 2013 quarter).

The company’s operating profit margin, however, behaved in an opposite fashion. Its OPM rose by 66 basis points to 8.1%, but declined by 1.2 percentage points sequentially.

What caused this? Compared to the year ago period, Reliance Industries’ cost of goods declined far more than sales did, therefore enabling an improvement in margins. But compared to the March quarter, the increase in input costs was higher than that of sales.

Thus, its operating profit rose by 3.9% over a year ago, but declined by 9.6% sequentially. Profit after tax rose by a respectable 18.9% over a year ago to Rs 5,352 crore, chiefly because of a lower depreciation and higher other income. Sequentially, PAT declined by 4.2%.

Divisional performance
Refining (contributes to 77% of sales and 56% of profit before interest and tax): The refining division’s realised gross refining margin (GRM) rose by 10.5% to $8.4 per brent barrel but was lower than the March quarter figure.
Revenues fell by 4.6%, which Reliance Industries attributed to a 3.6% decline in volumes and a 1% decline in prices. Exports rose by 8.6% indicating that domestic demand compression was responsible for the fall in volumes.
But higher refining margins contributed to a 38.5% increase in this segment’s profit over the year ago period, though sequentially profit declined by 16.2%.

In its commentary on refining margins, the company said that Asian middle distillate cracks will find support in the coming months due to higher demand for power from Middle East and European markets. It also said that gasoline cracks will be supported by demand recovery from the US market due to summer driving season. Naphtha cracks, however, were under pressure and may continue to remain so. This division will remain critical to Reliance Industries’ performance, till the oil and gas division picks up.

Petrochemicals (contributes to 21% of sales and 36% of profits):
This division’s revenues rise by 0.5% to Rs 21,950 crore, on the back of a 0.1% decline in volumes and a 0.6% increase in prices.

But segment profit margins rose over the year ago period by 56 basis points while sequentially the improvement was more modest at 5 basis points.

The company said that an improvement in the ethylene chain margins was chiefly responsible for better margins. Ethylene is processed to get final products such as polyester, poly vinyl chloride (PVC), HDPE (high density polyethylene) and LDPE (low density polyethylene).

Reliance Industries’ oil and gas division continued to disappoint, not surprisingly, as gas production from its KG /D-6 basin declined by 53% over the year ago period. The Panna-Mukti and Tapti fields saw a 19% reduction in crude oil output and a 5% decline in natural gas output.

Compared to the year ago period, revenues declined by 42% while profit declined by 63.8%. And on a sequential basis, revenues declined by 9% and profit by 23.5%.

These results were for its standalone operations. The company has given some details of its other businesses such as telecom, retail and international oil and gas operations. But these are not likely to reflect in its standalone business. Therefore it should be treated as commentary from the management, which can have a bearing on its consolidated performance. Here is some information on ventures, have not included telecom since it is in the process of being set up.

International oil and gas: Reliance’s share of gross production of shale gas in its joint ventures saw output attributable to it grow by 71% over the year ago period, and by 4% sequentially. Aggregate revenue rose by 84% to $214.5 million and by 11% on a sequential basis.

Organised retail: The company added 45 stores during the quarter. Same-store sales rose by 10% to 22% across formats, without specifying which formats were the outperformers. A combination of new stores and same-store sales growth contributed to a 53% increase in turnover to Rs 3,474 crore compared to the year ago period. Ebitda for the quarter was Rs 70 crore. This compares well with the annual Ebitda figure of Rs 78 crore in 2012-13.

On the stock market
Reliance Industries reported its results after market hours on July 19 so the market’s reaction to its results will be known only on Monday. Its profit was above market expectations but then the main reason for that appears to be the increase in its other income. Its share has been doing well and is up by 18% from three months ago, with nearly all that increase having taken place from a month ago.

One of the factors in Reliance Industries’ favour is that gross refining margins had perked up in the last month of the June quarter and if that continues in this quarter, then a sequential jump in refining margins may come to its rescue in the forthcoming quarters. Also, the Indian government has agreed to implement the C Rangarajan committee’s recommendations on pricing for natural gas. A move to market prices that are determined in a transparent manner and based on market benchmarks is expected to lead to a higher price for natural gas and also see gas output rise from its KG-D6 basin.

Read its press release and access the financial statement here.

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