Reliance Net Slumps Most in 3 Years as Gasoline Demand Declines

Reliance Industries Ltd., India’s biggest company by market value, posted the sharpest decline in quarterly profit in more than three years after refining margins narrowed amid slowing global economic growth.

Net income fell 21 percent to 42.4 billion rupees ($814 million), or 12.9 rupees a share, in the three months ended March 31 from 53.8 billion rupees, or 16.4 rupees, a year earlier, the Mumbai-based explorer and refiner said in a stock exchange filing yesterday. The median estimate of 30 analysts compiled by Bloomberg was a profit of 42.8 billion rupees.

A slowdown in China’s economy and Europe’s prolonged debt crisis cut gasoline and diesel demand, adding to the drag on Reliance’s earnings from lower production at India’s biggest natural gas deposit. Reliance, controlled by billionaire Mukesh Ambani, has gained 5.5 percent this year, trailing the 12 percent increase in the benchmark BSE India Sensitive Index.

“Lower gas output and refining margins have pulled down profit again,” said Kamlesh Kotak, vice president of research at Asian Markets Securities Pvt. in Mumbai. “Investors will be looking closely at when they will increase gas output. That holds the key.”

The shares fell 1.5 percent to 730.85 rupees in Mumbai yesterday, giving Reliance a market value of $46 billion. The earnings were announced after trading closed.

The consensus analyst rating for Reliance is the most bearish since January 2011, according to data compiled by Bloomberg. JPMorgan Chase & Co. downgraded the stock to underweight this month, Standard Chartered Plc cut it to “in-line” from outperform last month and Royal Bank of Scotland Group Plc reduced to hold from buy in February.

Refining Margin

The company reported a profit of $7.6 for every barrel of crude it processed into fuels in the quarter, compared with $9.2 a barrel a year earlier, according to the statement.

Reliance operates the world’s largest refining complex, consisting of two adjacent plants that can turn a combined 1.24 million barrels of crude into fuels daily. Crude-processing accounts for almost 65 percent of its revenue.

The facility at Jamnagar in the western state of Gujarat has the capability to turn cheap, low-grade crude into high-value fuels. A narrowing difference between lighter crude oil, which is expensive, and heavier varieties that are cheaper, hurts Reliance’s earnings.

Brent crude in London trading gained 11 percent this year. The June contract $1.16, or 1 percent, to $119.16 a barrel as of 10:57 a.m. New York time yesterday.

Light, Heavy Oils

The average difference between light Brent crude oil and heavier Dubai oil was $2.23 a barrel in the quarter ended March 31, compared with $4.93 a year earlier, according to data compiled by Bloomberg. The spread was $2.62 a barrel in the preceding quarter.

Profit from turning Dubai crude into diesel in Singapore, a regional benchmark, averaged $16.81 a barrel in the quarter, compared with $18.49 a barrel a year earlier and $18.22 in the preceding quarter, according to data from PVM Oil Associates Ltd., a London-based crude and refined-products broker. It fell to a 15-month low of $14.45 a barrel on April 13.

Reliance’s refining profit was also hurt by lower production because of a shutdown in February, Credit Suisse Group AG analyst Sanjay Mookim said in an April 17 report. The company shut a crude distillation unit at the newer 580,000 barrel-a-day facility for three weeks in the quarter.

Reliance had cash and equivalents of 702.5 billion rupees as of March 31, according to the statement, boosted by the sale of stakes in oil and gas fields to BP Plc. Total debt was 682.6 billion rupees.

Gas Field

The company sold a 30 percent stake in 21 fields, including the KG-D6 deepwater block in the Bay of Bengal, to London-based BP last year for $7.2 billion.

Reliance’s gas output from KG-D6, the nation’s biggest, fell 23.5 percent in the year ended March 31, according to the statement. Daily output, which peaked at about 60 million cubic meters in June 2010, has dropped because of technical difficulties in the reservoir, Reliance said.

“Operationally, they aren’t doing well at all,” said K. Ravichandran, the Chennai-based co-head of corporate ratings at ICRA Ltd., the local affiliate of Moody’s Investors Service. “The positive thing is they have more cash than debt and that means on the debt side, they won’t have any problems.”

The Chinese economy expanded 8.1 percent in the first quarter this year, the slowest pace since the second quarter of 2009. The government in March cut the growth target to 7.5 percent for this year, after keeping it at 8 percent in the previous seven years.

Oil prices have moved for more than two years on developments in the euro region’s debt crisis and its projected impact on the continent’s energy demand. The crisis that began in Greece has spread to Ireland, Portugal, Italy and Spain.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE