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Reliance Industries net may rise just 2.7 per cent on weak refining margins

Although InfosysBSE 1.32 % has begun the quarterly results season with a bang, the next most-keenly awaited result of Reliance IndustriesBSE 0.78 % is unlikely to create such a stir.

The second most valuable company in India is likely to maintain its profitability from the previous quarters with the most aggressive estimates pegging the profit growth at a meagre 2.7 per cent year-on-year.

RIL's performance for the July-September 2013 quarter will be bogged down by a lull in the regional gross refining margins (GRM). Reuters' Singapore benchmark GRMs were down to a 12-quarter low of $5.4 per barrel during the latest quarter, according to a report by 
Merrill Lynch.

Reliance Industries net may rise just 2.7 per cent on weak refining margins

RIL is likely to post GRM of around $7.8/barrel, down from $9.5 of year-ago period and $8.4 of the immediately preceding quarter. GRM is the differential between sales proceeds of refined petroproducts and cost of crude oil needed to produce them.

There won't be anything new in the company's ailing E&P business, which should post over a 50 per cent drop in profits compared with a year-ago period.

The company's KG basin gas production, which was around 15 mmscmd in the April-June quarter, is likely to have dropped below 14 mmscmd.

Similarly, the production from Panna-Mukta-Tapti (PMT) fields is also on the decline.

The third key business segment of the company — petrochemicals — is expected to do much better with a margin expansion, thanks to a spike in prices and a rise in domestic customs duties since May 2013. The July-September quarter could have turned much worse for the company, but for two important macroeconomic drivers.

rupee turned extremely volatile and ended nearly 12 per cent weaker from the previous quarter. This means its GRMs, although lower in dollar terms, should translate into a better number in rupees. Also, the resultant jump in crude oil prices from Rs 5,750 per barrel in the April-June 2013 quarter to Rs 6,800 in July-September quarter will bring some inventory gains.

Similarly, the gas and oil it produces will fetch more in spite of lower volumes. The domestic
interest rates soared during the quarter with the yield on benchmark 10-year government bonds briefly crossing 9 per cent during the quarter.

The average yield for the quarter was almost 100 basis points higher than the April-June quarter. This should boost the company's other income, which has long emerged as a key source of its profits. The RIL scrip has under-performed the 
BSE Sensex since its last quarterly results, although its profit for the April-June quarter was at the top-end of street expectations.

A similarly dispirited performance could continue even after this result unless the company offers clarity on the progress of its various expansion projects.