Reliance: Stock could see further downside
Net profit growth at Reliance Industries fell for the first time sequentially in more than eight quarters, largely driven by falling revenue, a depreciating rupee and crunched refining margins.
On the bottomline front, Reliance Industries reported a 13.6% drop with net profit placed at Rs4,440 crs for the quarter ended December 2011. Margin pressures increased in the December '11 quarter in its two main businesses - petroleum refining and petrochemicals due to moderation in demand.
The company earned $6.8 for every barrel of crude it refined into petroleum products, compared with $10.1 in the July-September 2011 quarter and $9 during October-December 2010.
Operating profit in the refining segment fell by 30.8% on lower gross refining margins, while in the petrochemical segment, it was down 11.2%. And as RIL pumped out less gas, revenues from oil & gas exploration plunged 32.2%.
The oil & gas segment was the second-worst performer reporting a drop of 14% in profits, but that was due to a 32.2% fall in revenues due to a decline in production and a 30% stake sale to BP. The petrochemicals segment's profits fell least 11.2% to Rs 2,157 crore.
However, the fall was restricted mainly due to the 23.9% jump in revenues as margins were down 430 basis points. Other income contributed close to 30% of RIL's pre-tax profit in the December quarter.
Included in RIL’s PAT for Q3 is Rs 1717 crore of other income generated from its mountain of cash worth Rs 74,540 crore. Hence qualitatively RIL core earnings have actually taken a big hit and without this the bottomline would have been far worse.
Viewed against this backdrop, the buyback announcement that it will acquire up to 120 million fully paid-up equity shares or 3.6% of the total outstanding shares from the company could not have come at a more appropriate time. Firstly, the company is flush with cash - Rs 74,539 crore at end December 2011. Secondly, the stock has underperformed the market over the past one year and would have continued to do so in the light of the latest results.
However the Equity Buyback programme announced is just a small sentiment booster as it will account for just 3.6% of the equity of Reliance, also the company will make this Buyback it from the open market up to a price of Rs 870 level by earmarking Rs 10, 440 crs for this programme and not at Rs 870 which is important.
Going ahead, the outlook for the coming quarters hardly appears promising. It is one thing that RIL's December quarter numbers were bad. But the worry is that it could also signal a below-par show in the coming quarters, which could be bad news for its shareholders. The company benefits from its world-class scale of its operations, but at its core, remains a commodity business, which is susceptible to economic cycles.
On Monday when the markets open, Avinnash Gorakssakar believes that the markets are likely to give a thumbs down to these results despite the fact that an Equity Buyback has been announced promptly at this time but this is unlikely to change the market mood as core numbers are a worry. In fact going ahead, he foresees difficult times for both the Refining and Gas business at least for the next 2-3 quarters which is likely to keep the stock movement weak with no major triggers visible. Hence downside for the RIL stock looks very possible despite the Buyback sweetener.
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