Experts decode: What went wrong on RIL's petchem shocker

The Gross Refining Margin (GRM) for the June 2012 quarter rose to USD 7.6 per barrel as against USD 7.2 per barrel.

Also Read: RIL's Q1 net dips 21% on weak petchem margins

Prayesh Jain, analyst - Oil & Gas at IIFL was expecting the GRMs to be around USD 7 and says this USD 1 premium could have been because of the product mix possibly which could have been shifted towards gasoline. “That could be one of the reasons or the crude mix possibly could be the reason why they beat expectations on the GRMs,” he says.

Revenues from refining were at Rs 85,383 crore while the petrochemical business had sales of Rs 21,839 crore. However, margins for the petrochemical margins have fallen on an annual basis from 12% to 8%.

In refining, which is RIL’s core business, there are capacities coming up in the fourth quarter but there have been some delays on that front, with analysts wondering if it will be the game changer for the company going ahead.

On the refining segment front, Jain expects the GRMs to remain at current levels because although the demand has not been great globally, on the supply side also there are concerns with respect to delays and also there are some closures that are happening in quite a few refineries. Hence, he sees those as supportive.

While the refining figures were in-line with estimates, the petrochemical numbers came in as a shock for Narendra Taneja, bureau chief - South Asia, Upstream. “The rupee-dollar ratio has been helping refining and plus the way they have been sourcing their oil, a lot of it has been coming from Latin America and also from certain parts of West Africa plus the cargo parcels were organised which I think was in the market already that Reliance is doing better than any other company in this part of the world.”

Jain too is definitely concerned over the fall in EBITD margins for petchem. He wasn’t expecting such a sharp fall even though there were some pressures expected. “It is too sharp a fall for us to factor in. Possibly, we are more concerned because the tax rate is at low levels, 17.5% or thereabouts.”

While operationally the numbers seem to be positive, the initial reaction was that it was a very positive set of numbers but Jain does not seem to think it is now.

On petchem this is a very significant decline and looks like polyesters and chemicals have both weighed. “On the petchem side it has to be broken down as to why the EBITD margins have fallen this quarter. On those sustainable regions we will have to tweak our estimate accordingly on the downside and that will have to be factored in,” cautions Jain.

With petchem witnessing such a sharp decline despite NAFTA cracking so sharply, Taneja says one needs to find out what and where things went off-track.

He finds that the previous quarter was not that bad and they had been investing a lot of money as well as management time on the petchem side so somewhere things were not going the way management had expected.