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Thursday, January 19, 2012

RIL Earnings to Feel the Margin Pressure

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Refiner may report a fall in Q3 profit, but interest income to support bottomline

Reliance Industries' December '11 quarter numbers are likely to be dismal, following a pressure on refining and petrochemical margins and weakness in KG basin gas volumes. This will be its first time in the past two quarters to show a fall in profit. A spurt in its other income could be the only positive factor in its earnings. 

RIL's all three major business segments will face a fall in profit for the December '11 quarter, according to analyst estimates. The petroleum refining business, which brings in over two-third of its revenues, will see gross refining between $7 and $8 per barrel — substantially lower to $10.2 of the first half of FY12. 
The demand for petrochemical industry has remained under pressure due to slowing economic growth throughout the December '11 quarter. This is likely to impact RIL's second-largest business segment, which contributes more than a fifth of the behemoth's topline. 
The company's gas production from KG D6 basin has been on a steady fall after briefly touching 80 MMSCMD in December 2009. The production is likely to have averaged 41-42 MMSCMD for the December '11 quarter. Further, the 30% stake sale to BP would reduce RIL's contribution from the gas sale. 
However, this time, its sagging 
earnings will have support from a new fourth segment — other income. After the BP deal, RIL is sitting on a cash pile in excess of . 75,000 crore, interest income on which could prove a significant support to the bottomline. 
At the aggregate level, the company's profits are likely to be down 5-12% from the year-ago level of . 5,136 crore. Whereas, net revenues are expected to show a growth of 19-33% over . 59,789 crore of December 2010. RIL's cash pile continues to bulge, 
which is a good thing for its balance sheet. However, analyst community remains concerned about its potential use. "Cash flow is greater than capex, and a significant part of incremental cash flows are being driven to non-core businesses, which in our view are return dilutive," mentioned a Morgan Stanley research report that downgraded RIL to 'underweight.' 
ramkrishna.kashelkar 
@timesgroup.com 


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