Reliance Industries faces major margin crisis in refining

The GRM fell for the straight fifth quarter to $8.8 a barrel; rise of Petchem offsets the refining crisis

By Nevin John  
Thursday, January 17, 2019

Reliance Industries (RIL), India's largest company by market capitalisation, has posted a record Rs 10,251 crore quarterly profit in the third quarter when revenue has jumped 55.9 per cent to Rs 1.71 lakh crore. But an increase in the crude price has contributed largely to the jump in revenues, while gross refining margin (GRM) of RIL fell sharply to $8.8 a barrel, compared to $11.6 in the same quarter last year. With this, the company has recorded GRM fall in the last five consecutive quarters.

The petrochemicals business, which became the largest EBIT (earnings before interest and tax)-generating vertical in RIL about a few quarters back, has registered a 42.9 per cent growth in EBIT to Rs 8,221 crore. For a comparison, the EBIT of refining fell 18 per cent to Rs 5,055 crore. The revenues from both the refining and petchem verticals increased in line with the 10.4 per cent rise in average Brent crude price in the quarter.

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Chairman Mukesh Ambani said in the press communication about the "heightened volatility" in the oil price as one issue. "Competitive cost positions and integration benefits is core to our Oil to Chemicals (Refining and Petrochemicals) business, driving sustained performance even in challenging global business environment," he said in the communication.

In the third quarter, the benchmark Singapore complex margin averaged at $4.3 a barrel as compared to $6.1 in the second quarter and $7.2 in the third quarter in 2017-18. "The light distillate cracks dropped sharply due to slower gasoline demand growth. The decline in light distillate cracks weighed on Singapore margins despite gains in fuel oil and middle distillate cracks," said RIL in its statement. Increased crude oil production by OPEC has also weighed negatively on the crude oil benchmarks.

The oil and gas exploration and production (E&P) is another headache for the company. The segment revenue fell by 27.5 per cent to Rs 1,182 crore. But it continued making EBIT loss at Rs 185 crore. In the second quarter, the loss was Rs 480 crore. RIL along with its partner BP Plc has been making an investment of Rs 40,000 crore in its Krishna Godavari blocks for reviving the E&P activities, but it is yet to convince the investors.

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The big boost for RIL in today's time is its booming petrochemical business. The company has invested Rs 1 lakh crore in its petchem facility in Jamnagar, Gujarat for expansion. RIL says that the petchem volume growth was led by successful stabilisation of the refinery off-gas cracker (ROGC), which is largest in the world, its downstream units and new PX facility at Jamnagar. "Strong volume growth and robust polyester chain margins offset the impact of weaker polymer margins," it added.

Reliance Jio's revenue has increased by 51.2 per cent to Rs 12,302 core, while segment EBIT 64 per cent to Rs 2,362 crore. The customer base of Jio increased to 280.1 million as against 160.1 million in the same quarter last year. Reliance Retail is another success story-- it posted an EBIT of Rs 1,512 crore (up 210.5 per cent) on a revenue of Rs 35,577 crore (up 89.3 per cent). Global brokerage CLSA recently forecasted a growth of 12 times for Reliance Retail to around Rs 10 lakh crore in 10 years.

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