Higher natural gas production from the KG D6 fields off the eastern coast of India is likely to buoy revenues of Reliance Industries Ltd, or RIL, in the December quarter though lower margins on petrochemicals and oil refining are expected to temper profit growth, according to analysts tracking India’s most valuable company.

RIL is scheduled to announce its quarterly results on Friday.

A Mint poll of six domestic and foreign brokerages forecast an expected average net profit of Rs3,921 crore for the October-December quarter, an increase of 12% over the corresponding quarter of the previous fiscal, and average revenue of Rs51,577.2 crore, a jump of 63.4%.

The poll also pegged RIL’s gross refining margins (GRMs)—or earnings from turning crude oil into a number of high value fuels and products—at nearly $5.7 (Rs260.49) per barrel, way short of the $10 a barrel levels in the same quarter last year.

In a 6 January note to their clients, Mumbai-based Edelweiss Securities Ltd’s analysts Niraj Mansingka, Ruchi Vora and Abhishek Agarwal wrote: “RIL’s earnings will benefit from the ramp-up of KG D6 gas volumes. However, muted refining margin expectations and decline in petrochemical margins will limit results.”

Pointing to the possibility of the Mukesh Ambani-led company reporting the “lowest ever GRMs in the past several quarters” owing to a weak refining environment, Rohit Nagraj, sector analyst for Prabhudas Lilladher Pvt Ltd, wrote in his report the same day: “Petrochemical prices remained stable during the quarter. However, the feedstock prices moved up slightly. Hence, (these) margins are anticipated to be a tad lower sequentially (compared with July-September quarter).”

According to Nagraj, average Krishna-Godavari basin gas volumes, an estimated 45 million cu. m a day (mscmd) this quarter, will add heft to RIL’s profits.

Another analyst with the Indian arm of a foreign brokerage said one of the key things to watch out for was whether RIL’s new 580,000 barrels a day Jamnagar refinery has stabilized its operations or not. “KG D6 gas and the new refinery are assets that are contributing to revenues this year. Not only were these revenue taps not turned on last year, the corresponding quarter last year was also affected by adverse demand conditions in the aftermath of the global meltdown, leading to a base effect.” Base effect refers to an unusual spike or drop in a company’s financials in one quarter due to extraordinary reasons. Year-on-year comparisons in such cases appear much better or worse.

The analyst, who did not want to be named, agreed that it was business as usual for the oil-to-yarn and retail conglomerate, and that much of the “noise surrounding the company has been on account of its acquisition efforts or fund raising exercises”.

RIL has submitted a preliminary, non-binding bid for the bankrupt Dutch petrochemical maker LyondellBasell Industries AF in its largest and most ambitious acquisition attempt. Analysts are watching how far RIL will go to acquire the firm, which is being valued upwards of $13.5 billion by the Street and will need to be integrated in the difficult labour markets of the US and Europe. As of now, its offer is being pushed back by the existing management and secured creditors of LyondellBasell, which could mean that RIL will have to sweeten the bid and raise its offer price.

RIL has raised nearly Rs12,980 crore by selling its treasury stock in three tranches over the last four months, most likely to create a war chest for the LyondellBasell deal.
RIL’s takeover bid comes on the back of a subdued sectoral outlook. Motilal Oswal Securities Ltd’s analysts Harshad Borawake and Milind Bafna in their sector preview report have said that they “expect margin pressure on petrochemicals to continue from likely supply from new Middle East petrochemcial plants”.

RIL could look forward to revenues from KG basin as gas production is expected to be ramped up to 60 mscmd by December and 80 mscmd by March, added Borawake and Bafna.

Gas revenues, however, depend on the outcome of a three-year-old legal battle between RIL and Anil Ambani’s Reliance Natural Resources Ltd. The latter is claiming 28 mscmd of gas at a price 44% cheaper than the government price, citing a family demerger arrangement in 2005. The matter is awaiting a decision from the Supreme Court.

Source: Live Mint

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