Reliance Q2 net up 9 per cent on higher petrochem margins

Better margins in petrochemicals have helped Reliance Industries partly offset a decline in refining margins and deliver better than expected results.

Reliance Industries Limited (RIL), the country's largest private sector company and the most valuable among all listed companies, has reported second quarter results, which are modestly better than market expectations. Volume growth remains very strong, helped by a stellar export performance, but overall margins have come under pressure because of higher input costs and a decline in refining margins.

For the quarter ended 30 September 2006, RIL has reported a 9.19 per cent rise in net profits to Rs2,709 crore, or Rs19.4 per share, from Rs2,481 crore, or Rs17.8 per share for the previous year quarter. Total revenues increased 37.44 per cent to Rs28,474 crore from Rs20,717 crore for the previous year quarter.

Analyst estimates of second quarter net profits were in the range of Rs2,500 crore to Rs2,600 crore.

Operating profits or EBITDA, excluding other income, increased 22.98 per cent to Rs4,565 crore from Rs3,712 crore for the same quarter of previous year. Operating margins as a percentage of total revenues declined to 16.03 per cent from 17.92 per cent a year ago.

Input costs went up sharply by 49.09 per cent during the quarter and led to the margin contraction. Staff costs were higher by 9.65 per cent while the company managed an 8.8 per cent reduction in other operating costs.

Interest costs for the quarter were higher by 25.23 per cent and depreciation charges went up by 26.62 per cent. Total outstanding debt as at the end of the quarter went up to Rs24,288 crore from Rs21,866 as on 31 March 2006. Tax provisions increased by 36.3 per cent over the previous year quarter.

RIL's petrochemicals division continued its strong performance with a 33.08 per cent rise in gross revenues. The division's profit before interest and tax (PBIT) went up by a very impressive 37.92 per cent and contributed 48.76 per cent of overall PBIT. Margins improved to 16.2 per cent from 15.7 per cent for the previous year quarter.

The refining division saw a marginal 2.8-per cent decline in PBIT during the quarter, on account of lower refining margins. Gross refining margins declined to $9.1 per barrel as compared to $10.4 per barrel in the previous year quarter and over $12 per barrel for the first quarter of current year. PBIT margins declined to 8 per cent from 9.6 per cent. Gross revenues from refining increased 24.81 per cent during the quarter.

RIL's refining margins remain one of the highest in the world as a result of its ability to process heavy grades of crude oil, which are cheaper than standard light grades. During the first half of the current financial year, the refinery processed 15.7 million tonnes of crude oil - operating at nearly 95 per cent of capacity. Exports of refined products for the first half were 8.76 million tonnes valued at around $5.5 billion.

Retail sales of fuel in the domestic market had declined drastically after the company raised prices above those of PSU oil marketing companies. However, this led to a substantial rise in exports during the quarter. Total exports, including refined fuel and petrochemicals, surged 142 per cent to Rs19,413 crore for the quarter. Exports constituted more than 68 per cent of total revenues.

During the quarter, the company's Hazira plant was affected by floods and led to production losses. However, costs for repairing the plant at Rs34 crore was much lower than analyst expectations.

The company said development plans for the natural gas reserves discovered in the KG basin are progressing as per schedule. The company has already placed orders for critical equipment and drilling of four development wells is expected to start later this year.

The company is planning to produce 40 million cubic metres of natural gas per day from the field by 2008 or 2009. Expansion work at the Panna-Mukta and Tapti blocks on the west coast are also on schedule and would be completed by next year. Reliance is also planning to start production of coal-bed methane (CBM) by 2009.

RIL is gearing up for the launch of its mega retailing venture, with an estimated investment of Rs25,000 crore. The company is expected to launch the retail division in Hyderabad before the end of this year. The retail business would straddle a range of formats from small grocery & vegetable stores to large-format hyper markets.

RIL is also rumoured to be in discussions to acquire UK-based Wood Group, which is a provider of deepwater engineering, oil pipeline and other oil & gas related services. The deal size is estimated to be over $2 billion and would strengthen the oil & gas exploration and production business of RIL.