RIL Q4 Profit Slumps 21% on Falling Refining Margins

COMPANY ROOTS FOR MARKET-LINKED PRICES

Reliance Industries' quarterly net profit fell 21% as refining margins contracted and KG-D6 gas field continued to falter, but the company said its refineries were outperforming peers and that it would make multi-billion-dollar investments in exploration and production subject to marketlinked prices and government approvals. The company also said it was a strategic priority to invest $4 billion in a petcoke project, and produce syngas, which is a clean fuel that can replace costly liquefied natural gas. Lower energy costs because of syngas would help boost refining margins by up to $1 per barrel, industry experts said. Margins of its refining, petrochemicals and oil & gas businesses contracted but its cash kitty swelled to . 70,250 crore. Reliance also reiterated its commitment to high-speed wireless data services and said its retail business, which has already become the leader in consumer electronics, food and apparel, will continue to grow. 

Refining margins, or the money made from processing crude oil at the world's largest refinery complex at Jamnagar, contracted to $7.6 per barrel from $9.2 per barrel, while a plant shutdown reduced the total crude the company processed in the quarter to 16.26 million tonnes from 17.24 million tonnes, bringing down external sales by 6.2%. 

Analysts said refining margins were better than analysts' expectations. The company said margins across all regions had improved since the third quarter and Reliance was doing better than its peers, particularly in Europe, where plants were closing down or running at reduced rates. 

"Our businesses have delivered industry-leading performances," CMD Mukesh Ambani said in a statement. "We have created a strong foundation for future growth and are investing in our core upstream and petrochemicals businesses in India. Response to our organised retail business has been very encouraging and we continue to expand our footprint by building more stores across verticals, formats and geographies," he said. Market-linked Prices Important

In a presentation to analysts, the company said market-linked prices were important. It said a "strategic priority" was, "subject to government approvals and market-linked pricing environment", ensuring "multi-billion-dollar investments to create a pipeline of production and reserves". 

Standalone net profit for the January-March quarter dropped to . 4,236 crore although it was propped up by 'other income' that rose to . 2,295 crore from . 917 crore a year ago. Other income rose during the year primarily because of higher liquid investments after the $7.2-billion deal to sell stake in oil & gas blocks to global major BP. Operating profit before other income and finance costs fell sharply to . 3,904 crore from . 6,456 crore in the last quarter of 2010-11. 

Sanjeev Prasad, director at Kotak Institutional Equities, said Reliance's refining margins would be seen as a "positive" but there were negatives as well. "Basically, RIL has benefitted from volatile crude prices this quarter as its crude inventory was largely hedged against the price swings, but a large chunk of the profits this quarter accruing from other income and the fall in production at KG-D6 are huge concerns, so the stock will definitely be downgraded." 

Reliance's oil & gas division's EBIT dropped to . 951 crore from . 1,569 crore as gas output from the KG-D6 block declined. The company attributes the fall to unexpected reservoir complexities and disagrees with the directorate general of hydrocarbons' view that production has dropped because the company did not drill the required number of wells. 

It said experts from BP and Reliance had taken steps to diagnose the field's problems. "Significant steps have been taken by the joint technical teams at BP and RIL in assessing complexities based on which an integrated plan for work-overs/side-tracks and additional wells can be executed, subject to necessary regulatory and government approvals," it said. 

Its refining business' margins shrank to 2.2% from 4% a year ago, but the company sees new trade opportunities. It said specifications of refined products are getting tighter and the company's ability to produce high-quality fuel from inferior and cheaper grades of crude oil placed it at an advantage. The company had expanded its footprint in the highmargin markets in Asia and further strengthened its presence in the ultra-low sulphur diesel market, it said.

Analysts said the company's gross refining margins (GRM) had exceeded expectations. "The GRM of $7.6 per barrel is quite encouraging especially as the street was expecting a weak set of GRMs," said Devang Mehta, vicepresident and head (equity sales), Anand Rathi Financial Services. Apurva Shah, vice-president and head of institutional research at Prabhudas Lilladher, said the market would see the margins as a "surprising positive". 

But analysts were concerned about the high share of 'other income' in its profit. "A major chunk of RIL's profits this quarter are accruing due to 'other income', which almost doubled on a yearly basis and increased significantly on a quarterly basis. The street might view this as negative as it is not an optimal operational performance that has led to the gains," said Arun Kejriwal of Kejriwal Research & Information Services.