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For the last few quarters, the steadily deteriorating performance in the oil and gas business of Reliance Industries was being offset by strong showing in its refining and petrochemicals segments.
This has come to a halt in the latest quarter, with all segments registering a fall in profits, both on a sequential quarter and year-on-year basis. Consequently, the company's overall quarterly profits in December 2011 have dipped around 22 per cent sequentially and 14 per cent year-on-year.
The profits in the high-margin oil and gas business slid around 14 per cent due to the ongoing fall in gas output (around 40 mmscmd currently) and sale of 30 per cent stake in the oil and gas fields to BP. Positively though, the segment improved its operating margin to around 46 per cent. The outlook for this segment remains weak at least until 2014, when gas output may again pick steam.
Refining setback
The refining segment, which was a positive counterweight in previous periods, failed to provide succour in the December quarter. The segment posted gross refining margin of only $6.8 per barrel, down sharply from $10.1 in the September quarter and $9 a year ago.
The company's traditional GRM premium over the Singapore benchmark is expected to have shrunk sharply. The segment's operating margin was sharply lower at 2.2 per cent, from around 4.5 per cent in the September quarter. The refining market environment is currently weak, and until the cycle turns, RIL's performance may continue to be adversely impacted.
The petrochemicals segment was also dragged down by a weak pricing environment, which resulted in profits declining around 11 per cent compared to the September 2011 and December 2010 quarters. The segment's operating margin has also moderated to 10.9 per cent from 11.5 per cent in the September quarter. The ongoing weakness in the global economy could continue having a negative effect on this segment .
Buyback boost
With little positive to show in its scorecard, RIL's share buyback plan seems to be an attempt to assuage investor sentiment. Under the buyback, RIL could acquire shares up to a price of Rs 870 a share (around 10 per cent premium over Friday's close). This should help cushion against a sharp decline in the stock's price in the near-term.
Over the last week, the stock gained around 11 per cent mainly due to positive sentiment about the buyback. However, over the long-term , unless there is a substantial improvement in performance or a major earnings-accretive development, upside in the stock price seems limited.
The company's cash coffer has further swelled in the December quarter to Rs 74,539 crore. This has also translated in a sharp increase of around 56 per cent in ‘other income' for the company. Optimum utilisation of this mammoth balance will be keenly watched.
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