Analysts see subdued Q2 earnings growth for Reliance Industries

Written by Aveek Datta | Mumbai | Updated: Oct 13 2014, 15:11pm hrs
RelianceRIL?s September quarter earnings are expected to remain under pressure.
The July-September quarter is likely to be a subdued one for oil-to-yarn and retail conglomerate Reliance Industries (RIL) in terms of earnings growth, analysts tracking the company observe. The company, which is scheduled to announce its earnings on October 13, is likely to see marginal growth in net profit compared to the year earlier, and growth may remain flat sequentially.

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This is due to low gross refining margins globally, a result of economic weakness in regions like China and Europe. The weakness in refining margins is expected to be partially offset by strong petrochemical margins and higher volumes of refined crude products during the quarter.

A Bloomberg poll of the earnings estimates put out by 14 analysts tracking RIL pegs the companys standalone net profit for the September quarter at R5,581 crore, 4.2% higher year-on-year and a decline of 0.88% sequentially. The Mukesh Ambani-led conglomerate is expected to post a turnover of R98,357 crore during the same period, 12.22% higher over the year earlier and 3.32% higher over the June quarter.

RILs September quarter earnings are expected to remain under pressure due to a decline in its gross refining margin, which is calculated as the difference between the value of petroluem products sold and the cost of processing crude.

An earnings preview report dated October 8 by Morgan Stanley expects RIL to report a GRM of $8.3 per barrel, compared to $8.7 per barrel in the June quarter. The expected dip in RILs GRMs is in line with the regional trend as the benchmark Singapore GRM declined 17% quarter-on-quarter and 12% year-on-year to average $4.8 per barrel during the previous quarter.

Analysts expect RILs GRMs to drop by a lesser extent compared to the Singapore GRM, which will help the company maintain its premium over the regional benchmark on the back of favourable light-heavy spread, an October 10 report by Antique Stock Broking states. Due to the high complexity of RILs refinery in Jamnagar, Gujarat, the company enjoys a competitive advantage as it is able to utilise cheaper and impure varieties of crude to yield the same product slate that other refiners produce using purer and more expensive crude.

The decline in overall refining margin is due to a decline in spreads of individual products like diesel and naphtha, which comprise a sizeable portion of RILs product slate.

While RILs refining business is expected to disappoint, its petrochemical business is expected to provide some support to the bottomline. There is sharp improvement in olefins, led by PE (polyethylene) and PP (polypropylene). RIL... would benefit from this trend and should provide quarter-on-quarter growth in earnings for their petrochemicals business, says an October 7 report by ICICI Securities.

The April-June quarter was the first period for which RIL opted to publish consolidated financial results, taking into accounts other businesses like retail and US shale gas operations that are conducted through subsidiaries. The companys management had said that from now on, it would be publishing consolidated results along with its standalone financials. For the three months ended September 30, RIL is expected to post 1% quarter-on-quarter decline in net profit at R5,890 crore, largely due to consolidation of expected losses at Network18 Media and Investments, says the Morgan Stanley report. RIL completed the acquisition of Network 18, media and entertainment company, in the first week of July.