Stability returning to RIL's core businesses

Even as Reliance Industries’ profits are up in the December 2013 quarter, thanks to a rise in other income, the good part is that stability is finally returning to most of its businesses.

The earnings volatility in its petrochemical business and decline in the exploration and production business have been stemmed.

The stability in its top line, both sequentially and annually, is suggestive of this trend.

Though the December 2013 quarter was expected to be operationally weak, the company has reported a 10.5 per cent rise in sales to Rs 106,383 crore (Rs 1,063.83 billion) compared to last year.

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Sequentially, too, revenues have remained flat, though its refining business saw some days of maintenance shutdowns and weak domestic demand impacted the petchem business.

However, performance during the quarter has been largely in line with market expectations.

Revenues from the refining business declined 2.1 per cent, sequentially, but rose 10 per cent year-on-year (y-o-y) to Rs 95,432 crore (Rs 954.32 billion).

Segment margins declined annually from 4.2 per cent to 3.3 per cent, but remained stable sequentially.

Revenues from the petchem business rose 1.6 per cent sequentially and 14.6 per cent annually to Rs 25,280 crore (Rs 252.8 billion).

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The Ebit (earnings before interest and taxes) margins for the petchem business dropped 40 basis points, y-o-y, to 8.4 per cent.

The big surprise, however, has come from oil and gas.

After several quarters of decline, revenues and earnings from the exploration and production business have risen.

Analysts believe the period of decline is over and gas production will pick up from the current quarter.

During the December 2013 quarter, RIL had produced 13 million standard cubic metres a day (mscmd) of gas and the stability in production has aided margins to expand from 24.3 per cent in the second quarter of FY14 to 31.2 per cent in the third quarter.

During the corresponding quarter last year, oil and gas business margins were at 30.7 per cent.

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The segment’s 18.4 per cent sequential jump in revenues, however, is not because of increase in production.

There was some surplus crude from the previous quarter, despatched in the third quarter, and that helped shore revenues.

However, Deven Choksey of KR Choksey Securities believes gas production could inch up to 15 mscmd from the next quarter and this would give a further boost to the segment’s margins.

The company has also conveyed to analysts that with the commissioning of one more well, production could pick up as soon as the fourth quarter of FY14.

Other than oil and gas, the other big trigger for the company is expected to be retail.

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The firm’s retail sales have risen 38 per cent y-o-y to Rs 3,927 crore (Rs 39.27 billion) in the December 2013 quarter.

During the first nine months of FY14, retails sales have risen 40 per cent to Rs 10,857 crore (Rs 108.57 billion).

Analysts expect this growth to reflect in the bottom line, too, in the coming financial year.

Driven by the performance of the oil and gas and retail sectors, analysts believe the stock is a candidate for an earnings upgrade.

However, most analysts are unlikely to increase earnings estimates for FY14.