The Hindu Business Line : Reliance under pressure on lower refining margins

MORE than the maintenance shutdown of the refinery it is the drop in refining margins that seems to have hit Reliance's performance hard in the third quarter ended December 31. Operating margins are down by more than 2 percentage points for the quarter to 16.38 per cent from 18.51 per cent in the same period in the previous year.

The refining segment accounts for just 38 per cent of the total profit before tax of Rs 2,240 crore in the September-December 2005 period. In the third quarter of the previous fiscal, it had accounted for 58 per cent of total profit before tax of Rs 2,698 crore.

The continued strong prices of polymers helped the company as the segment pushed up its contribution to 48 per cent from 31 per cent in the same period last year. It could have been better if not for the constraint in production of polymers such as polypropylene, which was affected by the shutdown of the refinery.

Propylene, the basic raw material for production of polypropylene, is a product of oil refining. Similarly, production of purified terephthalic acid was also affected by the shutdown as paraxylene is a product of oil refining.

It is not known if Reliance has accounted for the Rs 750 crore that it is supposed to bear as part of the overall subsidy sharing mechanism among the oil companies. Assuming it has not, the picture could turn bleak for the company on the earnings front in the fourth quarter.

Oil prices are steady in the $60 range which means that there is little scope for a boost in refining margins in the next three months. Of course, if prices spike upwards suddenly, which does not appear a big possibility at the moment, refining margins, presently at $9.1 per barrel, could bounce back.

The performance of Reliance in the fourth quarter may well ride on the petrochemicals business rather than on oil refining.

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