Reliance Industries’ higher output offset by lower margins in the December 2009 quarter

Reliance Industries results were largely in line with expectations. The petroleum major’s sales rose by 93% to Rs 58,848 crore in the December quarter, compared to the same period last year. Its net profit, however, rose by a more modest 16% to Rs 4,008 crore. There were a few reasons for the significantly higher growth in sales. The December 2008 quarter was a relatively bad one and RIL’s sales had fallen by 9%. Its refinery at Jamnagar had been commissioned in December 2008 and would have operated at much lower capacity, than in the current fiscal. Gas supplies too have contributed significantly to RIL’s sales and profits in the current quarter. On a sequential basis too, RIL’s performance has been good, with sales rising by 20% but net profit rose by only 4%, indicating a pressure on margins.

  • Highlights of the December quarter
  • RIL’s sales growth of 93% during the quarter was mainly because of its refining and marketing business, which contributed 72% of revenues. R&M sales grew by 143% over the December 2008 quarter and 21% over the preceding quarter. A fully operational Jamnagar refinery reflected in year on year growth. RIL’s oil & gas production business did well, as production from the KG6 wells rose.
  • The oil & gas divison’s revenues more than tripled to Rs 3,530 crore over last year, and were up by 20% over the preceding quarter. The petrochemicals business had a relatively sedate quarter, with revenues up by 17% to Rs 14,756 crore over last year and up 11% over the preceding quarter. While volumes grew by 20% over last year to 5.5mn tonnes (flat over the previous quarter) lower price realisations hit value growth.
  • On the profit front, RIL did face some pressures, however. While the R&M business may have been a star performer for revenues, its segment profit declined by 27% to Rs 1,379 crore. While volumes nearly doubled refining margins are under pressure. Gross refining margins fell to $5.9 per brent barrel (bbl) during the December 2009 quarter compared to $10/bbl in the corresponding previous period.
  • Segment profit margins in the oil and gas business too fell, which was due to higher proportion of revenues from KG D6, the company said. Segment margins declined to 41.8% from 58.6% but were flat over the previous quarter. Margins fell due to a higher depletion rate in KG D6 compared to the Panna-Mukta-Tapti fields. But margins were constant compared to the preceding quarter.
  • In the petrochemicals business, margins were up at 13.9% compared to 13.1% but were down on a sequential basis. The company attributed this to lower growth because of timing effects on pricing of products. That would mean that while raw material prices went up, product prices were yet to move up.
  • RIL’s operating profit margins declined to 13.8% in the December quarter, from 18.2% in the corresponding previous period and is also down compared to 17% in the previous quarter. Its total material cost was up by 117%, much higher than its sales growth, but staff costs fell by 8% and other expenditure grew by only 17%.
  • RIL contained the increase in interest costs to 14% but other income fell by 23%. Higher interest will be due to commissioning of projects, leading to interest being charged to the profit and loss account. Lower cash and cash equivalents, at Rs 15,959 crore compared to Rs 28,500 crore in the corresponding previous period, would have been mainly responsible for lower other income .
  • Profit before tax rose by 19% to Rs 5,007 crore but a higher tax burden led to net profit rising by 15%. RIL voluntarily gave up the EOU status for its refinery as it saw better opportunity in the domestic market. But domestic sales would be subjected to income tax, which is reflected in its numbers.
  • These are standalone numbers and do not reflect its retail business, which has gone through a bad phase due to the downturn. The company has also been selling its own shares held by the Petroleum Trust, which will reflect in its wholly owned subsidiary’s numbers. Consolidated results will be available when the company reports its full year numbers for March.
  • Going forward, the oil and gas business will continue contributing to growth in sales and profits. But the refining business will show strain for a few more quarters, especially on a year ago basis, as GRM was about $10/bbl in the March quarter. If the global economic recovery becomes more broad-based and not just restricted to developing markets, fuel demand may start rising leading to better product prices for refiners.

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