The December quarter earnings of Reliance Industries (RIL) may be hurt by lower crude oil prices, believe analysts. As experts build in their quarterly expectations in their preview estimates, it seems that besides mark-to-market inventory losses, an over 40% fall in the crude oil prices in the quarter is also seen to affect petrochemical segment of the petroleum giant.
In a recent research note, Credit Suisse says RIL is likely to report a net profit of Rs 5,100 crore at standalone level, down 11% y-o-y and 7.3% q-o-q even as at consolidated level the impact of lower realisations may not be seen. This is because RIL consolidates its US shale operations with a lag of one quarter.
For the three months to December 2014, the benchmark brent crude oil prices have declined from $95 a barrel to $57.3. The average prices for the period stood at $77, down 30% y-o-y and 25% q-o-q.
Credit Suisse noted that despite using weighted average method of inventory valuation, which dampens the volatility, RIL may see a noticeable mark-to-market inventory losses given the decline in crude oil prices have been large enough.
“The petchem business might also be affected by inventory losses. Falling prices could also lead to sales deferrals/discounting. RIL’s gas crackers would also be less profitable now,” added the foreign brokerage that has used gross refining margin (GRMs) of $8 per barrel for its Q3 estimates. It also adds that in case inventory losses were lower due to a GRM of $8.5, RIL may report a total profit of Rs 5,400 crore.
While Bloomberg consensus has a compilation of 3 analysts, it reflects expectations of Rs 5,808 crore of PAT for the December quarter while the topline is seen declining 6% to Rs 97,618 crore.
At a time when falling crude prices, concerns around investments in telecom business, lower refining margins and prolonged uncertainty around government’s decision on natural gas price have weighed on the RIL stock, a weaker Q3 print may put further pressure on the scrip. RIL has underperformed the 30-share Sensex, every year since 2010 and trailed the benchmark returns by almost 30%.
JP Morgan, which maintains a ‘neutral’ rating on the stock, issued a bear case note on RIL in early November where it acknowledged that despite lacking near-term catalysts, RIL is better equipped to ride out down-cycle compared with its peers.
The brokerage in December pointed out that lower cotton and oil prices will limit the upside in RIL’s near-term earnings even ass petchem
capacities will be a key driver for earnings growth in fiscal 2015-16.