Volatile Crude to Put Pressure on RIL Gross Refining Margins
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.