Stock Review: RIL

THE quarterly scorecard of Reliance Industries, India's most valuable company by market capitalisation, has disappointed the Street a tad bit. While nobody was expecting any fireworks, given the company has been facing problems with its gas production in the Krishna Godavari (KG) basin, what has surprised analysts is the company's tepid refining margins.

RIL posted sales of `75,283 crore and net profit of `5,376 crore in the quarter ended March 31. The net profit has been slightly below expectations, claim some analysts, who were expecting it to be upwards of `5,400 crore. The turnover increased 29 per cent to `258,651 crore ($58.0 billion) and exports increased 33 per cent to `146,667 crore ($32.9 billion). Net profit for the year increased 25 per cent to `20,286 crore ($4.5 billion). The petrochemicals segment recorded its highest ever earnings before interest and taxes (Ebit) at `9,305 crore ($2.1 billion), up 8 per cent year-on-year. Ebit margin for the year was at 14.7 per cent, as compared to 15.5 per cent in the previous year due to base effect of higher revenues. Margin improvement in the polyester chain, polypropylene and rubber products was partly offset by lower margin in polyethylene (PE). However, net operating margin for FY11 was marginally lower at 15.4 per cent, as compared to 15.9 per cent in the previous year.

The market is foxed by the gross refining margins (GRMs) at $9.2/bbl in the fourth quarter. Analysts typically compare RIL's GRMs with that of Singapore as India commands a premium of $3 to refining margins there. However, analysts say Singapore GRMs are at $7.2/bbl, which is why the Street was expecting RIL to clock at least $10/bbl. This has not happened and the company has also not provided any specific explanation for the same. The reason RIL commands a premium is because the company has a better production slate than Singapore and also because the crude RIL buys is cheaper than Singapore.

As for its oil and gas business, the company produced 8million barrels of crude from its KG basin and 720 bcf of gas, both are much below the expectations. The company's revenues from oil and gas have sequentially dropped 5 per cent and Ebit has dropped 8 per cent. A lot will hinge on the company's gas production which has been dipping over the last few quarters. Till the company finds a resolution to this issue, it will be an overhang on the stock.