The Hindu Business Line : Reliance Industries: Worrying signals

Reliance Industries’ first quarter results for 2008-09, declared on Thursday, apart from being a tepid show, throws up some worrying signs on the near-term outlook for the company. Not surprising then, that the market sent the stock down by 6.41 per cent to Rs 2,158 on Friday, higher than the 3.4-per cent fall in the Sensex for the day.

The 13.22-per cent growth in post-tax earnings is the slowest in the last eight quarters, after the 9.18 per cent growth of April-June 2006.

The first quarter’s performance is characterised by an under-performance of the petrochemicals business — akin to the last few quarters — and a lukewarm show in the main oil refining business, which has been driving earnings in recent times. The petrochemicals business, where earnings before interest and tax fell by 14.42 per cent to Rs 1,579 crore, is under pressure due to rising feedstock prices and slow demand growth. This has been the story over the last few quarters anyway.

What’s new now is that the oil refining business, which was compensating for petrochemicals, is also coming under some pressure with gross refining margins (GRM) plateauing out. Reliance’s GRM of $15.7 a barrel in the first quarter is at its highest ever, but the more important point is that it is only marginally higher than the $15.4 a barrel that it registered in the same quarter last year and $15.5 a barrel posted in the January-March 2008 quarter.

The flat growth in GRMs is worrying because Reliance’s refinery is already operating at full capacity. Given this, it’s rising margins that will have to drive earnings growth and not higher volumes. With crude oil prices weakening by about 13 per cent over the last one week, there is more reason to worry. GRMs typically drop in an environment of falling crude prices and Reliance could find itself in a spot of bother, if global oil prices extend their decline.

There is also a temporary over-supply situation in the international market for transportation fuels, specifically petrol. There have been reports from the market that Reliance was forced to export about 5.40 lakh tonnes of petrol at a steep discount to prevailing prices in the last couple of months.

The over-supply position could worsen when the new 29-million tonne refinery of Reliance Petroleum under construction now, goes on stream in the next few months, pumping its products into the global market.

The outlook for petrochemicals is none too good either. Though a fall in oil prices could have a benevolent impact on petrochemical feedstock prices, Reliance could be faced with stagnant demand given the slowdown in critical user industries such as automobiles. The one development to look forward to amidst all this is the commencement of commercial production of gas from the KG Basin, which is expected in the third quarter of this fiscal.

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Strong refining margins drive Reliance net up 13%

More Stories on : Petroleum | Performance | Microscope | Reliance Industries Ltd

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