Reliance Industries' high gross refining margins may help narrow stock gap with Nifty

ET INTELLIGENCE GROUP: The fastest earnings growth in the nine quarters reported by Reliance Industries ( RIL) in the September 2015 quarter may help its stock to narrow down its underperformance as compared with the Nifty.

The shares of the company have dropped 9.7 per cent in the past three months against 3.35 per cent fall in the Nifty. RIL’s performance was boosted by a seven-year high in its gross refining margins (GRM) at $10.6 per barrel. GRM is the difference between the value of petroleum products sold and the cost of the processed crude. This resulted in a 42 per cent year-on-year jump in the operating profit of the refining business atRs 5,461 crore. Refining margins expanded by 528 basis points to 9 per cent.

There are three reasons why GRMs of RIL expanded. First, the premium of RIL’s GRM over the benchmark Singapore GRM widened to $4.3 per barrel, one of the highest levels since 2009.


A large proportion of the decline in Singapore refining margins were driven by a drop in fuel oil prices, while RIL refineries do not produce the fuel. At the same time prices of some of the heavy crudes are linked to fuel oil; this increased the premium to the benchmark margins.

Second, given the complexity of its refineries, the company can process heavier crudes which trade at a discount to the main crude benchmarks.

This reduces the company’s procurement cost, while realisation remains intact as prices of products are market determined. The third factor is that it produced more gasoline, where realisations were higher than diesel. Analysts factored in the GRM of $9 per barrel for the current and the next fiscal year. The company may see an expansion of $1-$1.5 per barrel in GRM after its Petcoke plant will be operational from the middle of next year.

This new plant will help company reduce gas imports for refinery operation, thus boosting the margins. The importance of the refining segment can be gauged from the fact that this business accounted for nearly two-thirds of revenues as well as operating profit of company on a consolidated basis in September quarter. RIL’s shares are trading at 9.6 times its next year estimated earnings. Operating profit is expected to grow at 22 per cent annually in three years helped by new refining and petro projects. The near-term trajectory will depend upon the operating profit guidance of the company’s telecom venture.