Given the increased chances of an economic recession in the West undercutting world fuel demand and prices, Reliance Industries (RIL) has lowered its outlook on refining margins for the next three-four quarters. The company posted a net profit of Rs 17,955 crore in Q1, up 46% on year, primarily on higher refining margins, allowed by tight global oil markets.
“Recession fears (are) overtaking oil market fundamentals, resulting in lower prices and margins,” joint CFO V Srikanth said in an earnings call late Friday.
Analysts, however, feel RIL’s fears are slightly overblown since oil prices, after coooing off a bit in the last two weeks, have further breached the $100 a barrel-mark to trade at $103.2/bbl on Friday. P Morgan had, on July 8, said the brent might hover around $104 a barrel in the current year.
Srikanth said: “We are seeing the impact of (recession/slowdown and interest rate hikes by central banks). These factors (will influence) the outlook for the next three to four quarters.”
The government, which imposed export tax on auto fuels on July 1 citing windfall profits made by some of the domestic refiners, removed the tax on petrol on July 19 and slashed the levies on diesel and aviation fuels as the margins declined in sync with softening of the Brent crude prices. It also exempted exports from SEZs from the taxes, a move that is seen to benefit RIL the most as at least half of its petroleum products exports are from units located in Jamnagar tax-free enclave. The government has also said the taxes would be revised promptly, taking into account the changes in export margins in every fortnight.
Though RIL did not disclose its gross refining margins (GRM), the Singapore GRM averaged at around $20 a barrel in the first quarter. Even as the regional benchmark has since then fallen significantly; Morgan Stanley had, in a note on July 20, estimated RIL’s prevalent GRM at $13/barrel, near the upcycle margin.
RIL’s GRM came under some pressure following imposition of export duties and windfall taxes by the government from July 1.In a July 20 note, Jeffries said the slashing of the taxes reversed the negative impact on RIL’s GRM from $ 7-9/bbl earlier to around $ 1/bbl.
“Given that >90% of RIL’s exports is via the SEZ unit, the exemption effectively lowers the impact of export duty on its realised GRM to ~$ 1/bbl. This too, in our view, could be mitigated as the residual export volumes could now likely be placed in the domestic markets. In our view, this negates the regulatory overhang on RIL from the 1st July move,” it said.
For the April-June quarter, RIL’s oil to chemical (O2C) business that includes refining, petrochemicals, fuel retailing and aviation fuel among others reported highest-ever earnings before interest, tax, depreciation and amortisation (EBITDA) at Rs 19,888 crore, 62.6% rise year-on-year, on the back of strong fuel cracks and stable downstream contribution. This was, however, slightly offset by high energy and freight costs. The EBITDA margin was at 12.3%.