Though Reliance Industries Limited (RIL) remains unhappy over the price of domestic gas derived from the Rangarajan Committee formula, there is little doubt that at around $8.4/mmbtu, its investments in the E&P business already look a lot more remunerative. Though the business is still far from making money, the fact is that RIL and its partner BP have announced $5-6 billion of investment plans based on the Rangarajan-formula hike. On Friday, RIL reported an earnings before interest and tax (ebit) of R540 crore for the E&P piece in Q3FY14, down from R590 crore in Q3FY13, but up sharply from R356 crore in Q2. That was a surprise in an otherwise ordinary set of numbers. Net profits of R5,511 crore for the quarter were boosted by other income and gross refining margins (GRM) came in at just $7.6/ barrel—lower both sequentially and year-on-year—while the petrochemicals business was under pressure with ebit slipping 15% sequentially. Meanwhile, the shale gas piece continues to do well—at 43Bfce, volumes were up 33% yoy while revenues rose 29% yoy.
The Street has for a long time been concerned about how RIL would utilise its strong cash flows—estimated at around R30,000-35,000 crore annually—and how soon the new businesses will start contributing to the bottom line. The retail venture is struggling—the PBDIT in the nine months to December was R271 crore, on revenues of R10,857 crore. And although RIL now has a unified telecom licence and could be a formidable player if all goes to plan—share prices of rival telcos fell on news RIL would participate in the forthcoming spectrum auctions—it will be several years before the profits kick in. However, RIL has said it will invest in the E&P business. Earnings, subdued for several years now—compounded earnings growth was a mere 4% between FY08-FY13—are projected to grow at a compounded 18-19% over the next two years. While a fair share of this will be due to a near doubling of the firm’s petrochemicals capacity, an uptick in GRMs is also forecast.