RIL Q4 nos disappoints street, but experts are not worried

Index bellwether Reliance Industries disappointed the street with its fourth quarter numbers. The net profit came in below estimates at Rs 4,710 crore, a rise of 19% year-on-year. Sales came in more than Rs 3,000 crore below estimates at Rs 57,570 crore.
But the real disappointment came in from the gross refining margin front, which came in way below estimates at USD 7.5 per barrel.
The company's petro-chemical and refining margins stood at 14.4% (17.6%) and 3.87% (10.8%) respectively. Depreciation too has come in higher at Rs 3,392 crore as compared to Rs 1,448 crore in the same period last year.
Speaking on the quarter gone by, RIL said Krishna-Godavari D6 crude oil output touched 30,000 barrel per day. "Refinery throughput stood at 61 million tonne In FY10."
On the lower GRM number, RIL sees FY11 GRMs better than FY10. "Higher oil product demand will help improve GRMs. We have been widening the heavy-light crude differential to aid GRMs. We see heavy-light differential widening to USD 9 per barrel."
India's largest private sector refiner gained Rs 8,606 crore from treasury share sale in FY10. It has a cash, cash equivalent of USD 4.9 billion as on March 31.
What do experts make of RIL’s earnings?
RIL has posted a net profit of Rs 4,710 crore as against SP Tulsian of sptulsian.com estimate of Rs 4,760 crore. "I won’t be taking this as a disappointment because they have provided a tax liability of 14.07%. The company also issues credit notes in the fourth quarter only. I have estimated the credit note amount to be about Rs 250 crore. They may have gone to the extent of Rs 300 crore." He feels the results may not go down well with the market. "There has been a wide variation in the estimates by various broking houses. It has been as high as Rs 5,900 crore."
Jigar Shah, Senior Vice-President and Head of Research, Kimeng Sec India, said net profit for the fourth quarter is slightly below expectation. "But because of the large size of operation that is not at all a concern." He does not expect the market to look so much into that small variation in the profit number. "If you look at the overall developments for Reliance, they are very good particularly on E&P finds that they have done, especially the recent shale gas venture and some of the other expected finds in the Indian oil exploration fields."
Deven Choksey of KR Choksey Securities had estimated a figure of Rs 5,400 crore. "At that point of time, we had taken depreciation at around Rs 2,850 crore vis-à-vis the depreciation figure which has come closer to Rs 3,400 crore."
He too feels the market would not be totally disappointed because. "If they had depreciation, it means lower profit at the net level. This would not be something which will be seen as completely negative. It would be completely negative had EBITDA been a disappointment. But except GRMs, the EBITDA level disappointment is not there and that is where one needs to look at. In subsequent quarter also, if the GRM is going to be little bit disappointing, then possibly the revised estimate will have to be brought in."
FY11 earning estimates:
Shah expects FY11 earnings to expand by another 30% supported by increased gas sales as well as a very healthy increase in the refining output and GRMs, which are now much more stable.
On GRMs:
The GRM numbers have come in below Choksey's expectations. "The average GRM margin on Singapore crude oil is around USD 5 per barrel and the company has almost maintained the USD 4 kind of delta all throughout. We were expecting somewhere around USD 9 per barrel, against which this has come really low."
However, Tulsian is not disappointed by the lower GRM number. "I had estimated a GRM of USD 8.1 per barrel, including an inventory gain of about USD 1 per barrel."
On petro-chemical margins:
Rohit Nagraj of Prabhudas Lilladher feels there has been slight drop in petrochemical margins on a sequential basis. "We were expecting more or less flattish kind of petchem margins. Now, this could be attributed to lower volumes as well as naphtha prices, which have gone up on a sequential basis. That is the reason earnings before interest and taxes (EBIT) margins are slightly down. I don’t think there have been any problems because the prices of all the petchem products were pretty buoyant during the quarter."
Should you buy or sell RIL:
RIL continues to remain a buy for Shah. "Any dip in the coming week or when the market opens on Monday should be a good opportunity for investing in Reliance. If there is any improvement in the local fuel pricing policy based on the Kirit Parikh Committee recommendation, then that will be another positive. From here as I see it, there are only positives that you can look forward for Reliance Industries and therefore the stock continues to be a buy."
Nagraj continue to hold a buy on RIL. "We believe GRMs have bottomed out during the earlier quarter at about USD 5.9 per barrel. Incrementally, GRMs need to improve. Demand from Asian region has been picking up and probably the developed region also would start picking up, so GRMs will improve and that will have a major impact on Reliance. Its refining capacity itself stands around 1.25 million barrels per day. So, any smaller delta in GRMs would have an amplified impact on Reliance’s overall earnings. Coupled with that, you will have incremental earnings coming in from KG D6 ramp up production. Overall, we believe Reliance should post great earnings next year and the year after. Hence, we remain positive on Reliance."