The Hindu Business Line : Reliance Industries: Refining to the fore

First, the standout performance of the oil refining business thanks to a modern refinery and strategic management of the product slate. Second is the continuing pressure on the petrochemicals business and the complete dominance of the refining business over the former in the overall performance.

Reliance continued to capitalise on the capability of its refinery to process heavy, sour crude grades that sell at a discount compared to the more superior ones without compromising on the quality of refined products.

Product slate

It also managed the product slate to maximise output of middle distillate products such as diesel and aviation turbine fuel where margins were the highest.

These helped the company maintain gross refining margins at $15.5 per barrel, almost the same level as the third quarter ended December 2007.

However, the petrochemicals business continued to be a drag on overall growth. Margins were under pressure due to high feedstock prices and product prices not rising in tandem. The top line was boosted by the additional capacity from the new polypropylene and purified terepthalic acid plants but growth in the bottomline was not commensurate.

EBIT growth

Earnings before interest and tax (EBIT) grew just 6 per cent in the fourth quarter for the petrochemicals business compared to the same period last year; in comparison, the refining business showed a 25 per cent EBIT growth over the same period.

The picture deteriorated even compared to the third quarter, which by itself was a difficult one for the petrochemicals business. EBIT, at Rs 1,466 crore fell 17.5 per cent compared to the third quarter figure of Rs 1,777 crore.

Reliance relies on naphtha as feedstock for most of its petrochemical capacity and naphtha prices have been volatile and rising in recent times.

The petrochemicals business contributes just about a third of the revenues and about 37 per cent of annual earnings currently, down from 36 per cent and 42 per cent, respectively, in 2006-07. It is set to be relegated further into the background in the current fiscal once the KG Basin gas starts flowing and adds to the revenues and earnings.

This has important stock market implications because the Reliance stock could shed the discount that it now suffers due to the significant role of petrochemicals in its overall business profile.