INSIGHT: Reliance sales and profits drop but it beats expectations

28 January 2009 16:33  [Source: ICIS news]

By Malini Hariharan

MUMBAI (ICIS news)--When the going gets tough, even the tough struggle to keep going.

This has been evident in the latest round of quarterly results posted by the chemical majors. And it was further confirmed last week when Reliance Industries, India’s largest petrochemical player which is known to thrive in adverse market conditions, saw sales and profits drop in the fiscal third quarter.

Profits from its petrochemicals business dropped 6.8% to Rs16.57bn ($338m) for the quarter ended 31 December 2008, Reliance said.

The refining business, which accounted for over 60% of revenue and 45% of profits in the quarter, was hit even harder. Profits fell 28% from the same period last year, to Rs18.81bn. Sales were down 16.9% at Rs217.4bn.

Overall, Reliance saw a 9.3% drop in turnover to Rs325.35bn and a 9.8% fall in net profit to Rs35.01bn.

However, the company still managed to beat estimates by financial analysts who had expected even lower sales and profits as a result of the steep fall in crude oil, refinery products and petrochemical prices.

“We are surprised by these numbers. The company says it has a policy of moving products as quickly as possible and that probably helped in a falling market,” said one analyst.

In a presentation last week, Reliance said reducing high-cost inventories across the petrochemicals value chain had been its core objective in the quarter. Pricing was adjusted proactively to deal with volatile market conditions. Credit periods were reduced from 14 to 10 days and credit exposure limits were modified to reflect lower prices and the higher risk environment, the company said.

Other analysts referred to the integrated nature of the Reliance businesses which stretch from oil and gas exploration to refining, petrochemicals and even textiles.

A diversified product portfolio, especially in petrochemicals, also appears to have helped it weather the severe market conditions. Naphtha prices dropped 73% during the quarter, from their peak in July, while ethylene prices fell 68% and polyolefin prices 55%.

The Indian polymer market, which had enjoyed a few years of healthy demand growth, saw a deceleration, said Reliance.

A slowdown in economic growth hurt demand in key end-use segments such as consumer durables, automobiles, construction and infrastructure. Reliance estimated that demand for PVC, between April and December last year, declined by 4% while PP demand dipped by 3%. PE demand growth was positive at 2% due steady demand for packaging of consumer goods and ducting for telecom cables.

But Reliance remains optimistic for the current quarter as markets have started showing signs of a recovery in pricing and demand.

Indian polymer prices have risen by more than 12% over the past month although not everyone is convinced that these price gains can be sustained.

“This quarter should be better. Besides the price rise and improved demand, oil prices are not likely to fluctuate as wildly as the last quarter,” a second analyst pointed out.

Analysts think a big challenge for the company will be finding a home for products from its new 660,000 bbls/day refinery at Jamnagar.

The complex refinery, which is operated by subsidiary Reliance Petroleum Ltd, started processing crude on 25 December 2008 and is expected to be fully commercialised this quarter.

The challenge extends to petrochemicals as a new 900,000 tonne/year polypropylene (PP) plant, downstream from the refinery, is also due to start up. Exports from the new PP plant are expected to start in April.

But Reliance is confident that complex refineries, which are capable of processing heavier varieties of crude oil, will gain from potential closures. It estimated that 1.7m bbls/day of refining capacity in Europe was generating negative margins while 1m bbls/day capacity in North America was working on break-even margins.

A third analyst believed that the worst was probably over but he cautioned that margins were likely to remain soft if projects in the Middle East are commissioned as planned.

“Reliance seems to be confident of finding buyers. Volumes may not be an issue but prices could be low,” he added.

While it is safe to hope for better market conditions it would be wise to prepare for a tough year ahead. The last quarter was all about price falls, demand erosion and inventory correction.

The supply onslaught has yet to start. Projects have been delayed but many are in the final stages of completion and should be commissioned by the second half of this year.

The wave of capacities, 2m bbls/day of refining and over 5m tonnes/year of ethylene, is likely to be extremely difficult to absorb given weak global economic conditions.

($1 = Rs48.88)

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By: Malini Hariharan
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