Reliance likely to post $1 billion profit

As India’s most valuable firm Reliance Industries (RIL) gets ready to announce its third quarter results on Thursday, analysts with leading Indian and international broking houses are keeping their fingers crossed.

The petrochemical giant has, of late, developed a habit of surprising the analysts and also beating street expectations. The trend is likely to continue this time too. RIL is expected to post an over 25% increase in net profit, which is expected to touch Rs 4,000 crore ($1 billion), on a turnover of Rs 33,234 crore, according to ETIG estimates.

If we were to add the Rs 4,023 crore RIL gained from the sale of a 4% stake in Reliance Petroleum during the quarter, the PAT will zoom past Rs 8,000 crore (about $2 billion). The net profit is based on the assumption that RIL will post robust gross refining margins (GRMs) of over $15 per barrel during the December 2007 quarter. The rise in petrochemical prices and a modest increase in volumes will help the company post a substantial gain in turnover.

The improved performance will make RIL the second Indian corporate, after ONGC, and the first private sector company to cross the $1 billion mark in quarterly net profit. ONGC had posted a net profit of Rs 5,097.5 crore during the second quarter of 2007-08, the highest in Indian corporate history.

The October-December quarter witnessed strong growth in international refining margins, as prices of petro-products like petrol, diesel and naphtha rose faster than crude.

The benchmark Singapore refining margins almost doubled during the quarter to around $8 per barrel compared with the corresponding quarter in 2006-07. Meanwhile, GRMs in the US weakened during the period. The US is a key market for RIL, which is able to supply low-sulphur fuel. During the same period, GRMs in Europe and Asia improved.

RIL’s profits are likely to be high, despite an expected weakening of petrochemicals margins. Globally, the petrochemicals business has witnessed pressure on margins, as feedstock prices soared faster compared with the downstream petrochemicals and polymers. However, RIL will not face significant adverse impact, since some of its petrochemical units use natural gas as feedstock.

The erstwhile IPCL’s Gandhar and Nagothane petrochemical complexes and RIL’s Hazira petrochemicals complex are based on natural gas. Refining and petrochemicals contribute 98% of the company’s total revenues.

During the quarter, RIL’s Jamnagar refinery is likely to post around 5% fall in the volume of crude processed. This fall in production is likely to have a marginal negative impact on profits when compared with the corresponding previous quarter. The rupee’s appreciation, over the last one year, could also have a marginally negative effect on its financial performance.

On the Bombay Stock Exchange, the RIL scrip ended at Rs 3,098, down Rs 64, or 2%, over the previous day’s closing in a weak market.

Via ET