Q3 COMMENT. Reliance Industries wins big on refining

Except the exploration business which continued to disappoint, Reliance Industries (RIL) fired on all cylinders in the December quarter. This translated into a nearly 39 per cent jump in profits year-on-year to ₹7,290 crore, a record high.

Yet again, the charge was led by the company’s refining business. Even as the rout of crude oil continued unabated, RIL’s gross refining margin (GRM) touched a seven-year high of $11.5 a barrel.

This was aided by strong margins across the company’s product chain, including petrol, diesel and naphtha.

The widening Brent-Dubai crude differential also helped in reducing sourcing costs, with the company buying more of the latter. Add to the mix an all-time high crude processing by the company, and the refining segment’s profit nearly doubled year-on-year and its share in overall operating profit exceeded two-third.

The management does not see big refinery capacity expansions globally in the near-term and expects the good times to continue.

The petrochemicals segment, which contributed more than a quarter of RIL’s consolidated operating profit, benefited from healthy polymer margin, stable polyster chain margins and higher volumes.

The segment’s profit grew 28 per cent year-on-year. The company expects the pricing environment to remain favourable in the segment.

With the company in advanced stages of expansion in its refining and petrochemicals businesses, contribution from these segments should see an increase in the coming quarters and years.

The same though cannot be said about the oil and gas exploration segment which suffered a double-whammy – on pricing and volumes – in the December quarter and saw profit crash 89 per cent year-on-year.

Domestic output (gas production from the KG-D6 block) continued to fall, while prices took a knock both in India and in the US shale segments. Ergo: the exploration segment contributed less than one per cent of the company’s consolidated operating profit, a sharp fall from nearly 13 per cent in the year-ago period.

The company has been slashing its capital expenditure in the business significantly; so, an improvement in performance seems unlikely anytime soon.

With a share of 1.5 per cent in the operating profit, the organised retail business, in fact, contributed more than the exploration business.

The segment grew profit more than 10 per cent. Along with additions to its physical stores, RIL is also working on launching its e-commerce initiative in the segment.

The commercial launch of the much-awaited telecom business Jio is expected within the next few months, with 2016-17 being the first full of operations. So far, RIL has invested about ₹1 lakh crore in the business which may take a few years to break-even in a highly competitive environment.

With cash in excess of ₹90,000 crore though, RIL has adequate firepower to fund investments and expansions across segments.

Other income accounted for about a quarter of RIL’s profit before tax in the December quarter, higher than in the September quarter but lower than the one-third share in the year-ago period.

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