Petchem margins under pressure

Sequential improvement driven by refining, government approvals the key for E&P division RIL reported Q2FY13 Ebitda (earnings before interest, taxes, depreciation, and amortisation) of R77.1bn (-22% year-on-year, +14% quarter-on-quarter) and profit after tax of R53.8bn (-6% y-o-y, +20% q-o-q), 5% and 2% below our estimates.

The miss largely stemmed from weaker petrochemical margins and lower-than-expected volumes in the E&P (exploration& production) division, partially offset by lower depreciation and higher other income.

Net financial income contributed a high 20% of PBT (profit before tax). In our view, Q2FY13 was an expectedly strong quarter sequentially, driven by robust GRMs (gross refining margins), which we expect to moderate in coming quarters. Petchem margins remain subdued. Domestic E&P volumes continue to decline. We maintain an Underweight rating on the stock.

Entire sequential improvement driven by refining: RIL’s Q2FY13 GRMs were $9.5/bbl (barrel), up 25% q-o-q and at a $0.4/bbl premium over Singapore complex GRMs, but down 6% y-o-y. RIL attributed the better GRMs to overall improved product spreads and its flexibility to optimise refining yields to maximise margins.

The throughput of the refinery improved to 17.6 mt, up 1.7% on a q-o-q basis. Reported Ebit (earnings before interest and taxes) of R35.4bn for the division was up 65% q-o-q and 15% y-o-y. We highlight that the recent strength in GRMs is largely driven by unexpected refinery shutdowns globally, which we now expect to reverse. Coupled with additional new refinery capacity

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