Reliance Industries (RIL), which is is set to announce its December quarter numbers on Friday, is likely to witness a drop of in earnings compared to last year. Margin compression in its refining as well as petrochemical businesses, along with a decline in gas production in its flagship KG-D6 production block, is likely to weigh on its profitability believe analysts.
Various estimates peg the oil & gas major to report a 3% to 5% y-o-y decline in its earnings for the third quarter of fiscal 2013-14 to a range of R5,300- 5,200 crore, while the topline is expected to grow somewhere between 8% to 13% yoy.
Most experts expect RIL?s Gross Refining Margin (GRM) to decline to a nine-quarter low of $7.5 per barrel, depicting a nearly 22% decline compared to same quarter last year. GRM represents the difference between the cost of production and the value at which the company sells its petroleum products. While on sequential basis, the decline in GRM appears marginal (down 3%), the same is still likely to impact the refining operating margin. Ambit capital estimates that every US$1 per barrel increase (decrease) in GRM has a positive (negative) impact of 9-10% on RIL?s net profit.
According to BofA ML, Q3 Ebit ( earnings before interest and tax) of RIL would be hit by a 11% y-o-y fall in its GRM in R terms. Based on its expectations of 17%-39%fall in Ebit margin of both, refining and E & P (exploration & production) segments, BofA ML sees the overall Ebit margin to drop 6% yoy.
As per Nomura, which expects a sequential decline in each of RIL?s business segments, a q-o-q decline of 3% in RIL?s GRM still fares better than a 20% drop in the benchmark Singapore margin to $4.3 per barrel. Both, Nomura and BofA ML expect the EBIT margin of RIL?s petrochem business that accounts for nearly a third of company?s net earnings in FY13 to post yoy growth of 18% and 29% respectively.
Some analysts believe that though weak regional GRM would hit the earnings of refiners in general, RIL?s margins would be relatively protected by robust gasoil cracks and widening light-heavy crude spread.
The muted Q3 earnings notwithstanding, most analysts appear upbeat about the government?s recent decision to allow RIL to charge higher prices for its gas production from April 2014. Market experts hailed the price hike decision as a key positive for RIL, which is under arbitration to counter the government?s stand that non-drilling of the committed wells led to a more than 80% fall in the output in the KG-D6 basket to about 45 mmscmd (million metric standard cubic meter per day).
According to an analysis by Kotak Institutional Equities, a gas pricing of $8 per mmbtu could lead to an EPS (earnings per share) of R67.4 for fiscal 2014-15 if the production from the flagship basin stayed at 15mmscmd. The Street, however, appears to be taking a cautious approach on the RIL stock, which has underperformed the Sensex in each of the last six years. In 2013, the stock gained close to 7% compared to a 9% rise in the 30-share benchmark.
Although it is trending upwards since last six-months, the RIL stock continues to hover in a broad trading in a range of R770 -920 since more than a year.
