Reliance results as expected, no surprises: Experts

Mukesh Dhirubhai Ambani Group's flagship company Reliance Industries posted a rise in net profit in-line with expectations of a 20.2 percent quarter-on-quarter surge to Rs 5,376 crore in the second quarter of FY13. Gross refining margins went up by 25 percent to USD 9.5 a barrel in the July-September quarter of 2012 from USD 7.6 a barrel in a year ago period.

A panel of experts comprising Sonam Udasi, head research at IDBI Capital, Dilip Bhat, joint MD, Prabhudas Lilladher, Prayesh Jain , analyst - oil and gas, IIFL and energy expert Narendra Taneja explain to CNBC-TV18 the various aspects of the results Below is an edited transcript of the analyses on CNBC-TV18. Q: USD 9.5 per barrel, that’s a 40-cent premium over the Singapore Complex. Are you satisfied? Do you think it could have done better or is USD 9.5 decent enough to report given the kind of strength seen in refining margins? Taneja: It is a very decent figure. If we look at the overall market situation, the company has done very well. It has been, of course, sourcing at a very good price. At the same time, the company has new strategy with more focus on diesel and kerosene and finding good markets for both, I think, has helped.
So, in the given circumstances and comparing it with refineries in other parts of the world, I think it is a very good result. As an observer, I am quite satisfied. I wouldn't say I am surprised, but I am satisfied. This is more or less on the expected lines. Q: What do you make of the results? Do you think this performance is expected or do you think the street will react a bit positively? Bhat: I think the results more-or-less met expectations which were pegged at Rs 5,200-5,400 crore. But the company’s guidance on the refining margins that will have is largely going to determine the EBITDA.
I think petchem is not what too many investors are factoring-in at the moment because that is going to remain pretty muted or maybe flat. What investors will also be looking forward to is the probable grant of permission from the government to develop oil field. Q: We don’t have the petchem EBITD margins yet, but what would you have expected? In a short press release, the company explains that since China is going through a political transition there could be an uptick in petchem from Q1 of CY13 and it is likely that they have underperformed this time around. Do you think domestic demand will also remain weak with little support from the overseas markets? Taneja: Despite their best effort of actually revamping practically every single sphere of the petchem business, the last three months have been very challenging and I think this would reflect in the results. If the company can meet the the challenges, given the circumstances, it is quite okay.
The revamp in petchem the business over the past seven-to-eight months will probably start to bear some fruit depending on the market sentiment. If the markets get a little more favourable, especially the Indian market, then I think we will see probably see better results in two quarters from now.
This particular quarter has been very challenging. The results and indications are along the expected lines. I don’t think the company expected tom post such results as it has traversed quite an uphill road in the whole of last quarter. Q: What do you make of the results? What was your expectation? Jain: The results are in line with our expectation of USD 9.5 per barrel and flat EBITD margins. The only positive is that instead of an expected EBITD margin of 3.8 percent for refining, it has come in at 4 percent increasing the EBITD by Rs 150-200 crore which was against expectations. Otherwise, the results are very much in line with no major positive or negative surprises.
_PAGEBREAK_ Q: What do you expect going forward in terms of refining? Jain: The reasons why the GRM (gross refining margins) has been up was due to substantial shutdowns in refineries for maintenance in western parts of the world which came back to operation and we have seen spreads coming off. Going ahead, the demand side scenario is not very good – China, India and the western world are slowing down-  so we do not see the GRMs moving up. There might possibly be some downside somewhere in the region of USD 8.5 - 9 per barrel over the next couple of quarters. So the outlook is muted. Q: What about petrochemicals? Jain: A majority of the petrochemical sales for Reliance is in the domestic market where domestic demand has remained strong. But the increase in naphtha prices has been one of the key factors for the fall in spreads. The prices are being driven internationally- with low gas-based supply from the Middle-East and new capacities expected in China- the spreads are likely to be under pressure. So, this kind of performance might continue over the near- to-medium term. Q: What are you expecting in terms of approvals in the upstream segment? Jain: It is very difficult to comment on that but definitely if the approvals come in, it is a positive sign. Q: What do you think is required for Reliance to outperform from here? Jain: The next trigger will be how well the company utilises its cash balances and the kind of cash flow it will generate The kind of contribution that other income is making to the profit is a negative. The other factor is how well the company's E&P business performs because a small jump in the revenues can cause a material jump in profitability as that segment commands around EBIT margins of 40 percent. Q: What is your expectation on Reliance's outperformance?
Bhat: The full-year estimate is that probably the y-o-y growth will not be very significant, maybe a very nominal three-to-five percent, at best. I think the initiatives the company undertakes on gas is more important in terms of capex and permissions. Gas is a huge cash-generator and it can really push Reliance ahead very positively. But since there is some uncertainty on that front, my guess is that it would be, at best, a market performer. Q: The concern around Reliance is in the upstream segment. We have had a change of guard at the finance ministry; there is talk that from hereon it could be slightly supportive. Do you see this relation between Reliance and the government thawing at a certain point so that approvals could come faster? Bhat: It is very difficult to say. I would rather wait for the approvals to come. Q: Do you think having maintained petchem margins at Q1 levels could be called a positive for Reliance? Taneja: It is absolutely positive. We have to understand the sentiments across the market and that the company has also been investing heavily in petchem business not only in terms of technology revamp, but also in terms of giving a new direction to the whole business. Of course, the fruits of this will be seen in the next three-to-four quarters.
The E&P business is facing challenges not only in terms of geology but also in terms of relationship with the ministry of petroleum and natural gas and with the DGH. So, whatever improvement that might be expected in terms of E&P, will probably occur only next winter. Q: Do you expect some clarity on the pricing front before the 2014 deadline? Do you think it is possible that the government could finalise some price and the actual action could follow in 2014? Taneja: Right now, I think the government probably wants to do that. The officials in the ministry of petroleum or in the ministry of finance personally express the wish to do that, but at the same time, they want the right political climate in the country.  So, given scenario of this kind, I don’t expect anything until after there is a new government in place which probably may happen in the second half of next year.