Volatile Crude to Put Pres­sure on RIL Gross Re­fin­ing Mar­gins

The Economic Times - - Markets: Beating Volatility -

con­sid­er­ing higher volatil­ity in crude oil prices, which may in turn af­fect earn­ings.

The op­er­at­ing profit (EBIT) of the re­fin­ing busi­ness, which ac­counts for around two-thirds of to­tal profit, fell by 1.5% as com­pared with the pre­vi­ous quar­ter. This was ex­pected given the lower gross re­fin­ing mar­gin (GRM). GRM was at $10.8 per bar­rel com­pared with $11.5 per bar­rel in the pre­vi­ous quar­ter. How­ever, the seg­ment mar­gin im­proved by 200 ba­sis points to 13.3% due to ru­pee de­pre­ci­a­tion and bet­ter cost man­age­ment.

RIL’s petro­chem­i­cal busi­ness, the sec­ond-big­gest busi­ness of the com­pany, grew 7.8% quar­teron-quar­ter, ahead of ex­pec­ta­tions pri­mar­ily driven by higher sales vol­umes. As a re­sult, profit from this seg­ment grew 2.8% quar­ter-on-quar­ter. The op­er­at­ing mar­gin for this busi­ness was at 13% against 13.6% in the pre­vi­ous quar­ter.

Re­liance In­dus­tries has so far done well to man­age higher GRM but it will be dif­fi­cult to sus­tain th­ese lev­els. GRM is the func­tion of price of crude oil, a ma­jor raw ma­te­rial, and re- fined prod­uct prices which are the fi­nal prod­ucts. Choppy crude prices can lead to volatil­ity in GRM. The bench­mark Sin­ga­pore GRM in the cur­rent quar­ter till date is al­ready down by 35% as com­pared to the av­er­age GRM of the March 2016 quar­ter. This means prof­itabil­ity in RIL’s re­fin­ing busi­ness in the com­ing quar­ters will be lower.

The cur­rent stock price of RIL at .₹ 1,040.5 re­flects the pos­i­tive fac­tors such as high GRM and ro­bust prof­its. The next ma­jor trig­ger would be the com­mis­sion­ing of the pet coke re­gasi­fi­ca­tion plant. Once com­mis­sioned, the com­pany will be able to chan­nelise the gases re­leased from its busi­ness oper­a­tions for re-use in­ter­nally. This would re­place ex­pen­sive im­ported gas and help the com­pany im­prove prof­itabil­ity by low­er­ing cost. An­other trig­ger would be the launch of its 4G tele­com busi­ness which will keep the stock in the lime­light.

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