Refining to help pump up record profits for Reliance Industries

As Reliance Industries unveils its June 2011 quarter numbers on Monday, investors will be watching to see to what extent the strength in its refining profits offsets a drop in oil & gas profits and stagnation in petrochemicals. Most analysts expect the improvement in refining margins to outweigh RIL's challenges in other businesses and enable it post its largest-ever quarterly profits. However, the already visible slowdown in year-on-year growth rates is set to continue.

RIL's net profit for the quarter is set to grow 16.6% YoY to 5,658 crore for the June 2011 quarter while revenues will grow 28.7% to Rs 74,960 crore, according to the average of nine broking firms' estimates. This will be 5.2% higher than its March 2011 profit of Rs 5,376 crore, which was the company's highest-ever quarterly profit hitherto.

The company's petroleum refining segment is set to drive the profit growth, thanks to improved gross-refining margins. "We estimate RIL will report gross-refining margin of $10.3 per barrel against $9.2 in the March 2011 quarter, led by an increase in the product cracks," said Motilal Oswal in its result estimate report. Other broking firms have estimated RIL's gross-refining margins between $10 and $11 for the June 2011 quarter.

The petrochemicals division is expected to witness pressure as PE, PP and polyester margins remained weak during the quarter. How much gas RIL's KG-D6 field produced during the quarter could be an important factor in determining its net profit. The Street is expecting the average production to be around 49 million standard cubic meters per day (mmscmd). However, there is a possibility of downside risk.

Although another record level, the company's YoY profit growth has been seen slowing down over the past four quarters. The June 2011 numbers will be an extension of this trend. "The June 2011 quarter may be a slow-growth quarter with only marginal decline in E&P volumes and a slight decline in petrochemical EBIT being offset by a small increase in refining margins," said a result preview report from JM Financials, which estimated RIL's net profit to rise 15.9% YoY at Rs 5,621 crore.

In spite of the company achieving new record profit levels, its performance on bourses has suffered due to a series of negative news, including CAG's adverse report on its KG-D6 capital costs. With the government finally giving a go-ahead for a substantial part of the RIL-BP deal last Friday, investor sentiment is likely to receive a big boost. A strong quarterly result will go a long way to help it sustain the positive sentiment.