Reliance Industries Limited’s (RIL) has managed to post profits of R5,352 crore, up 19% yoy for the three months to June 2013, but much of this is thanks to more other income and lower depreciation; the operating profit has increased by just 4%. The key refining piece is under some pressure; although Gross Refining Margin of $8.4 per barrel for Q1FY14 have risen yoy, they have slipped sharply sequentially. The petrochemicals business too reported flat revenues and margins. While the KG Basin gas continues to do badly and production has fallen to a mere 14 mmscmd, its share of overall EBIT was just 6.7% in Q1FY14 as compared to 19.8% a year ago; what is interesting is the continued profitability of the US shale operations—for the first time, RIL’s EBITDA here is higher than that for the Indian E&P operations.
The turnaround of the domestic E&P business is critical for RIL. While the Reliance stock moved up 15% after the CCEA agreed to Rangarajan’s formula to price gas for the domestic market (right now, this translates to a hike in gas prices from $4.2/mmBtu to $6.83/mmBtu), RIL officials have made it clear the company is unlikely to make significant investments unless the sale price is increased to around $8-10/mmBtu. RIL has already made an investment of over $21 billion in the E&P space—if you include $8 billion of financing costs and $3.5 billion in wells that yielded nothing—but recovered $9 billion. So the company is already out of pocket and won’t gain much from the higher Rangarajan prices unless it invests more—and it won’t invest the $10 billion more it needs to unless gas prices are freed up, or unless prices of crude oil globally fall enough for capital expenditure costs to fall sufficiently.
As for RIL’s telecom foray, now that it has completed some tie-ups with existing telcos for renting towers and undersea cables, a large part of the telecom piece is complete—what’s left is either a takeover of an existing 2G telecom player for the underlying voice network or perhaps a tie up for roaming minutes with existing players. Getting the business to be profitable will take some years, given the well-entrenched nature of the competition and the fact that the existing 4G business is relatively untried. While RIL has scaled up its retailing business to over R10,000 crore, the business contributes little to the company’s valuation—barely 2% of the