RIL's petchem business to see steady growth ahead: IIFL

Oil and gas major Reliance Industries surprised the street by posting first profit increase after four quarters of declining returns, boosted by higher gross refining margins (GRMs) and good show from its petchem segment.

Prayesh Jain, oil and gas analyst, IIFL told CNBC-TV18 that the boost seen in the petchem segment was driven by the improvement in spreads rather than demand. "We have not seen demand improving a great deal across categories. Possibly, a couple of pockets have seen some volume improvement or some demand improvement, he added. The company posted a net profit of Rs 5,502 crore against the CNBC-TV18 poll estimate of Rs 5,060 crore. Quarterly revenues stood at Rs 93,886 crore compared to the poll estimate of Rs 90,750 crore. It posted an average gross refining margin of USD 9.6 per barrel for the quarter, compared to USD 6.8 in the same period last year.
In the longer term, RIL is expected to see strong margin once it ramps up its capacity. "Their petchem business is likely to see steady up move from here on," he added. Below is the edited transcript of Prayesh Jain’s interview with CNBC-TV18 Q: It’s a beat 90 basis points on the petchem side. They have shown 2 percent EBITD improvement on a q-o-q basis, what are you making of it? A: These are very strong numbers. We were not expecting it. EBITD margins in refining segment seem to be much higher than our expectation. Our EBITD numbers for refining segment was around Rs 2,956 crore. They have delivered around Rs 3,615 crore. It is very high as compared to expectation. On the petchem side, it’s a positive beat. We were expecting around Rs 1,825 crore EBITD and they have delivered Rs 1,937 crore. Their other income is at Rs 1,740 crore, which is lower than Q2. Q: From the delivery this time around, what do you make of what we can see in Q4 so far. At least in January diesel spread seems to have improved from where we ended in December? A: The surprise can be on multiple counts as to what kind of crude diet they had during this quarter. In Q4 if this kind of trend continues then GRM could possibly improve from current levels. If LNG prices start declining if not in the current quarter may be a quarter down the road then that could provide additional boost to GRMs down the road. Q: After having seen what they have delivered on the petchem side and even on refining does that inspire confidence in you that Q4 could be much better because petchem seems to be indicating even a demand recovery. How much of this do you think the petchem beat was demand led and how much of it because of improvement in spreads? A: Its more or less driven by the improvement in spreads rather than demand improvement. We have not seen demand improving a great deal across categories. Its not demand driven, possibly a couple of pockets have seen some volume improvement or some demand improvement, but most of it seems to be driven by spreads. In the medium term, once the company ramps up its capacity, the conversion cost is expected to reduce. Beyond FY15 and FY16 margins will be pretty strong for Reliance vis-à-vis what it is earning today. So, petchem business is likely to see steady up move from here on.