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Reliance Industries Ltd (RIL) reported a 4.5% year-on-year increase in second-quarter profit, driven by improved gross refining margins (GRMs) and lower input costs. Net profit, excluding those of its units, rose to Rs.5,742 crore for the three months ended 30 September from Rs.5,490 crore a year earlier.
Net sales dropped 7% to Rs.96,486 crore from Rs.1.04 trillion for the second quarter of fiscal 2014. A Bloomberg poll of 12 analysts had estimated stand-alone net profit of the company at Rs.5,596.5 crore and net sales at Rs.97,856.3 crore.
On a sequential basis, net profit rose 1.6% from Rs.5,649 crore and net revenue increased 0.14% from Rs.96,351 crore. Other income for the reporting quarter was at Rs.2,140 crore. Since the previous quarter, the company which has businesses spread across refining, petrochemicals, oil and gas exploration and production in India and the US, had started releasing consolidated numbers which include the earnings numbers for its retail business as well as US shale gas operations.
Including those units, the firm posted a revenue of Rs.1.134 trillion while net profit rose 1.7% to Rs.5,972 crore for the September quarter. The firm's earnings were boosted because globally, margins were better in ethylene, naphtha and ethane, while prices for products such as paraxylene continued to stay flat, Alok Agarwal, chief financial officer at RIL, said. This was further aided by demand for petrochemical products which increased by almost 4-5% as compared with the last quarter, he said. Mukesh Ambani, chairman and managing director, said RIL's financial performance for the period "stands testimony to the intrinsic strength of our integrated business operations".
"The refining and petrochemical businesses, once again, delivered robust results, outperforming regional industry benchmarks. Renewed optimism in the domestic economy augurs well for business and consumer confidence, particularly against the backdrop of continuing concerns on global economic growth.
We expect to create significant value for our stakeholders over the next 12-18 months as we complete our large investment programme across energy and consumer businesses. These projects will propel the next phase of growth for India and Reliance," Ambani said. The company's GRM-the difference between the cost of crude oil and the value of petroleum products refined from a barrel of crude-for the September quarter rose to $8.3 per barrel from $7.7 per barrel a year earlier.
During the quarter, the benchmark Singapore GRM-an average of the refining margins of several Asian refiners-was at a 16-quarter low of $4.8 per barrel, pulling down RIL's refining margin sequentially. RIL usually posts a $2-3 per barrel higher GRM than the Singapore benchmark.
On Monday, RIL shares fell 0.3% to Rs.957.85 on BSE, while the exchange's benchmark Sensex rose 0.3% to 26,384.07 points. "Impressive GRMs have fairly helped the performance, plus the overall margins are good, and the numbers are encouraging," said Jagannathan Thunuguntla, head of research, SMC Global Securities Ltd.
The other income component as a share of the total income also dropped from a year ago, which shows the firm is generating healthy revenue from core operations, he said. Thunuguntla said as far as the drop in revenue is concerned, RIL is not playing the volume game and focusing on improving margins.
The company's earnings before interest, taxes, depreciation and amortization (Ebitda)-a measure of the operating profit of a company-on a stand-alone basis for the quarter, stood at Rs.8,235 crore against Rs.7,849 crore for the year-ago period, a jump of 5%. Its Ebitda margin stood at 8.5% against 7.56% a year ago.
Due to higher GRM, the refining and marketing Ebit, or earnings before interest and taxes, which contributes more than 50% to overall Ebit of its three major segments of refining, petrochemicals and oil and gas exploration and production (E&P), increased 18.5% to Rs.3,844 crore from a year ago. "RIL's premium over regional benchmark widened to $3.5 per barrel, compared with $2.5 per barrel in the corresponding period of the previous year, primarily aided by wider crude differentials and sourcing advantage," the company said in a statement.
Its petrochemical Ebit, which contributes 30% to overall Ebit, dropped marginally by 0.8% to Rs.2,361 crore from Rs.2,381 crore a year ago, and the oil and gas production business continued its slide with a segmental profit drop of 14.4% to Rs.818 crore.
Agarwal said the capex for the first six months stood at Rs.45,000 crore and that the firm will invest Rs.50,000 crore more in the remaining half of the year. This will mainly go into the ongoing petrochemicals expansion.
The domestic exploration and production, mainly made up of the KG basin reserve, declined to 12.8 million metric standard cu. m per day (mmscmd) and the company said it will continue to be little changed, he said. RIL's retail segment reported an Ebit of Rs.99 crore, a 41.4% increase from a year ago.
Agarwal said e-commerce in the retail space has good potential and that the company will look at it and explore the synergies between retail and TV18, the media and entertainment company RIL took over on 30 May. On 11 October, Reuters reported RIL is seeking a buyer for its stake in the Eagle Ford Basin oil and natural gas joint venture with Pioneer Natural Resources Co., a sale that could raise up to $4.5 billion. Pioneer Natural Resources is a US-based firm.
The assets are also in the US. Agarwal said the company is a portfolio investor in the US shale gas operations and has seen a decent appreciation in valuation, especially in the Eagle Ford venture. "If we are offered a price that makes sense, we will look at it seriously," he said. Since the last one year, RIL has under-performed the benchmark index, rising only 11.7%. The Sensex has gained 29.72% in the period and the BSE Oil Index has advanced 29.6%.
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