India’s Reliance earnings get boost from refining, petchem ops

Focus article by Nurluqman Suratman

SINGAPORE (ICIS)–Reliance Industries Ltd’s (RIL) earnings over the next year will be supported by strong contributions across its refining and petrochemical segments, analysts said on Thursday.

The Indian conglomerate posted a 1.7% year-on-year increase in second-quarter net profit to Indian rupee (Rs) Rs59.7bn ($969m), despite a 7% drop in revenue at Rs964.9bn.

For the first-half ending 30 September, its net profit rose by 7.4% year on year to Rs119.3bn, with a 1% increase in turnover to Rs2,213bn.

RIL’s results in the second-quarter of its 2015 fiscal year were largely stable amid a modest improvement in its refining business, which more than offset the continued weak results from its upstream oil and gas segment, according to analysts.

On a year-on-year basis, the refining business’ earnings before interest and taxes (EBIT) rose by 4% year on year to Rs37.9bn in the second quarter, while the petrochemicals and oil and gas segments fell by 4% to Rs24bn and by and 6.7% to Rs3.3bn, respectively.

RIL’s downstream refining and marketing segment’s stable operating performance in the second quarter was largely attributable to the company’s high utilisation rate of 112%, which compensated for the marginal decline in its gross refining margins to $8.3/bbl compared to $8.7/bbl in the previous quarter, according to ratings firm Moody’s.

“RIL’s financial profile over the next 12 months will be supported by strong earnings contributions across its refining and petrochemical segments, even as the company increases its borrowings to partially fund its large Rs1,900bn capex [capital expenditure] plan,” said Vikas Halan, vice president and senior credit officer at Moody’s.

The capex covers expansion projects in the petrochemicals and refining business at Jamnagar, Dahej and Hazira, as well as RIL’s US Shale gas projects, according to analysts.

RIL is in the process of establishing the world’s largest petroleum coke gasification project in India’s Jamnagar region, according to Moody’s. Once completed, this $4bn project will convert petcoke from its refinery to high-value fuel.

This project is on track for completion by the end of RIL’s 2016 fiscal year, according to IndiaNivesh research.

RIL’s new refining and petrochemical projects are likely to be earnings incremental from the end of the 2016 fiscal year and into RIL’s 2017 fiscal year, it added.

“We believe the ongoing expansion of its downstream business would be the next earnings driver in the next two to three years,” said India-based brokerage Sharekhan.

In the near term, the company’s petrochemical business will stand to benefit from an expected marginal improvement in refining margins amid increasing demand over the next few quarters, said Mumbai-based Kisan Ratilal Choksey Shares & Securities.

“We expect recovery in downstream demand and improvement in global operating rates and it would be [a] positive trigger for the petrochemical business of the company, along with the petrochemical capacity addition and operational optimization,” it said in a research report.

($1 = Rs61.6)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections