RIL beats market expectations, but key numbers decline

MUMBAI: Reliance Industries met market expectations with its March quarter net profit exceeding that of the preceding quarter. However, there is a visible weakness in its operational performance, which is expected to continue for the next two quarters, and analysts are unlikely to revise their target price on the company.

A 32% year-on-year spurt in net profit in the March quarter may be a cause for cheer for RIL’s investors. However, the numbers are only a tad better than those for the October-December 2012 quarter, though mostly in line with market expectations.

More importantly, the performance appears operationally weaker as profits from all the three important business segments — petrochemicals, refining and oil and gas — were lower sequentially. Reliance’s operating profit was lower than expected due to the weakness in petrochemicals and oil and gas divisions, while the refining business did well, says a senior analyst working with a foreign brokerage house.

He did not wish to be named. It was mainly the higherthan-expected other income, at Rs 2,243 crore — over 31% of pre-tax profits — which propped up its bottom line. Petrochemical margins were weak at 8.6%, compared with 8.8% in the quarter to December 31, 2012, while natural gas production from the KG basin was down 21.8% from the preceding quarter at 61 billion cubic feet.

In the petroleum refining business, the gross refining margin or GRM, exceeded expectations at $10.1 per barrel, but volumes were down 8% due to a maintenance shutdown. The only bright spot is the shale gas business in the US, with its share of production rising 12% sequentially to 36.3 billion cubic feet equivalent (Bcfe) in the March 2013 quarter.

With the company’s performance on expected lines, investors will start looking for growth cues in the near term, which appear elusive. The industry is now into a season when demand for refined petroleum products is typically the weakest. This is bound to impact RIL's ability to maintain its $1 billion bottom line.

In the next two quarters, refining margins are expected to be subdued due to seasonal weakness, says Sandeep Randery, head of research, BRICS Securities. All key parameters should be weaker in the June quarter and possibly even in the September quarter, which are seasonally weak quarters, says an analyst with a foreign brokerage.

RIL has huge investment plans, but none of them are set to make any substantial addition to its profitability in the near term.

Analysts and investors alike will be waiting for more cues relating to the company’s investment plans in the oil and gas exploration business as well as in the new telecom vertical, with more specific timelines.