Reliance Industries, India’s second biggest company by sales, on Friday said its first quarter consolidated net profit rose 4.4% due to a strong growth in its gross refining margins (GRM), which is the difference between the price of crude oil and the price of the petroleum products produced by its refinery.
The company expects the margins to remain strong as demand will continue to rise and low crude prices would imply that energy costs will be low.
The Mumbai-based company chaired by billionaire Mukesh Ambani posted net profit of Rs 6,222 crore in the April-June quarter, compared to Rs 5,957 crore it had earned in the same period last year.
However revenue decreased by 23% to Rs 83,064 crore, from Rs 107,905 crore last year, due to lower crude oil prices.
On a stand-alone basis, Reliance Industries’s net profit increased by 11.8% to Rs 6,318 crore, while revenue decreased by 28.1% to Rs 71,412 crore.
While the results were announced after market hours, shares of Reliance Industries ended down 1.9% at Rs 1,025.05 on the BSE, in line with the broader index fall of 0.9%.
The Reliance stock had witnessed a sharp rise of 4% on July 22, on expectations that the company’s profits would rise 9-10% on estimates put out by brokerages.
Reliance Industries’s gross refining margins (GRM) for the first quarter stood at a six-year high of $10.4 a barrel, as against $8.7 in the same quarter last year.
“Our financial performance reflects the benefits of integrated hydrocarbon chain activities in a benign oil price environment,” said Mr Ambani. “The sharp increase in demand for transportation fuels helped us realize strong refining margins. Oil product demand globally is estimated to have grown at about 1.6 million barrels of oil a day, resulting in high refinery runs across all regions,” he added.
The fall in Reliance’s revenue was led by the 43.5% year-on-year decline in benchmark (Brent) oil price. Also, exports from Reliance’s Indian operations were lower by 44.9% at Rs 36,717 crore, as against Rs 66,600 crore last year, due to lower product prices in line with lower crude oil prices.
Crude prices have been falling since last year due to higher production by Opec (Organisation of Petroleum Exporting Countries) and the switch to shale gas by large economies like the US, which have led to a surplus in oil reserves. Brent crude, the global benchmark grade, is currently at about $56.51 a barrel on the London-based ICE Futures Europe exchange, a far cry from the over $100 it used to quote last year.
"If you see GRMs across the globe, everywhere refining margins are up. Globally demand has been up in the first half of 2015. The demand for oil is 1.6 million barrels per day. In whole of 2014 that was about 700,000 per day. So, low oil prices has resulted in stronger growth. Low oil prices also means your energy costs are lower…so environment was very constructive for refining,” joint CFO V Srikanth told reporters at a post results conference.
“The expectation is that even in 2016 the demand environment is going to be good. Broadly, the demand supply mismatch remains constructive towards relatively more demand than new supply. So environment is good,” he added. Reliance will take its total retail fuel outlets to 1,500 this fiscal end, from the current 440 operational outlets.
The management views were echoed by analysts. “The GRM is significantly higher than our expectations of around $9.4. So, it is a strong beat for us,” said Prayesh Jain, oil and gas analyst at IIFL.
“We continue to remain bullish as earnings upsides from new projects slated to commence operations in FY17 are yet not factored in. Retail business will see continued improvement both in revenues and EBIT margins.”
While the core businesses of refining and petrochemicals contribute the maximum to Reliance’s profits, the company has been investing heavily into other businesses such as retail and telecom.
Mr Ambani recently said the group will invest Rs 2.5 lakh crore in projects related to Digital India. Reliance will set up a network of 1.5 lakh retailers who will sell and service mobile phones and other smart devices. Most of the investments will be under Reliance Jio, a subsidiary.