Exports, petrochemicals help Reliance beat Street

Reliance Industries (RIL) reported a 1.5% on-year and a 2.6% sequential increase in consolidated net profit at Rs5,490 crore in the quarter ended September, in line with market estimates, following a surge in exports and a favourable rupee-dollar exchange rate.

RIL, which runs the country’s largest refinery complex at Jamnagar in Gujarat, reported a turnover of Rs1,06,523 crore, significantly higher than the market estimate of Rs99,450 crore.

An almost 11% rupee depreciation during Q2 helped RIL’s refinery and petrochemical operations. Its gross refining margins (GRMs) declined to $7.7 per barrel from $8.4/barrel in Q1 due to a weak petrol scene, widening the Brent-Dubai differential and lowering domestic sales.

The refining segment’s earnings before interest and taxes (EBIT) rose 7.6% sequentially, but fell 9.9% on-year to Rs3,174 crores due to higher exports.

During Q2, total exports of refined products reached $11.1 billion, accounting for 67% of the total refinery product volumes.

RIL’s Q2 GRMs were better than the Singapore complex average of $5.4/barrel on the back of wider light-heavy differentials and to some extent due to wider fuel oil cracks. GRMs are expected to remain volatile going forward.

EBIT of the petrochemicals business, RIL’s cash cow, rose 32.6% on-quarter and 43.9% on-year to Rs2,504 crore. Alok Agarwal, CFO of RIL, said petrochemical margins improved mainly due to volume growth and margin growth in the polymer and fibre intermediate business. However, standalone polyester business margins remained under pressure, he said.

The company also witnessed lower sales (down 25-30% sequentially) to public sector units during Q2 as demand for petroleum products was flat-to-negative in the country –  another major reason for RIL to focus more on exports.

RIL has seen a significant surge in demand for its petroleum products from Asia and West Asia, which contribute 40-50% to its total kitty, up from around 25-30% three years ago.

The company’s domestic gas business continued to remain under pressure as the KG-D6 production declined to 14 million metric standard cubic metre per day (mmscmd) from 15.3 mmscmd in Q1. EBIT of the exploration and production business  declined 58.9% on-year but grew 1.1% sequentially to Rs356 crore.

Agarwal said that unlike in the past, when other income used to be a substantial part of RIL’s earnings, this time the core operating income has improved.

RIL’s expansion of its polyester capacity at Silvassa is expected to come on stream in the next 2-3 quarters, Agarwal said. Currently, margins in the integrated polyster business remained weak; but the margin up-cycle is expected to come in 2014, by when RIL is hoping to be ready with extra capacity. RIL has plans to expand its polyester production capacity to 4 million tonne per annum (mtpa) from the current 2.5 mtpa, and is setting up an additional polyster filament yarn at Silvassa.

Retail up despite trouble from Telangana stir
RIL’s retail business which crossed Rs10,000 crore in turnover in Q1, saw a 31% on-year growth in Q2 with sales touching Rs3,456 crore. The company now operates 1,550 stores across 136 cities in India. During Q2, however, the company’s jewellery business was significantly impacted due to high gold prices and regulatory restrictions. “We were also impacted by some disturbance in Andhra Pradesh because of the Telangana issue, resulting in lower footfalls,” Agarwal said.

US shale gas business continues to improve
US shale gas: RIL’s shale gas business, which is often called as the next growth opportunity, saw a revenue of $193 million, reflecting a 33% on-year growth, while operating profit or Ebitda stood at $127 million. Shale gas production stood at 36.5 ‘billion cubic feet of natural gas equivalent’ (bcfe) in Q2. Agarwal said an Ebitda of $750-$800 million would make the business cash-positive.