Reliance Profit Beats Estimates as Refining Margin Widens

Reliance Industries Ltd., operator of the world’s largest oil refining complex, reported first quarter profit that beat analysts’ estimates and rose the most in a year after refining margin widened.

Net income, excluding that of units, rose 5.5 percent to 56.5 billion rupees ($936 million), or 17.50 rupees a share, in the three months ended June from a year earlier, Mumbai-based Reliance said yesterday. That exceeded the 53.7 billion-rupee median profit estimate of 25 analysts compiled by Bloomberg. Sales rose 10 percent to 963.5 billion rupees.

The company controlled by billionaire Mukesh Ambani depends on earnings from its two refineries to boost profit as natural gas production from its biggest deposit remains near the lowest in four years. Higher profit is crucial for Reliance which is spending 1.8 trillion rupees to expand its polyester, petrochemicals, refining and natural gas businesses and starting a new telecommunications service next year.

“The gas business is crucial for Reliance as the outlook for refining margins in Asia is not very strong because demand is falling,” said D.K. Aggarwal, New Delhi-based chairman of SMC Investments & Advisors Ltd., which manages about $100 million of Indian shares. “Diversifying its businesses should benefit Reliance when India’s economic growth starts reviving.”

India’s gross domestic product growth forecast for the year ending March was raised to 6.3 percent from a 6 percent pace by the Asian Development Bank on July 18 on expectation the new government will overhaul policy and spur investments.

Refining Margin

Reliance earned $8.7 for every barrel of crude it turned into fuels in the quarter, compared with $8.4 a barrel a year earlier and $9.3 a barrel in the three months ended March, the company said.

The company operates two refineries with a combined capacity of 1.24 million barrels a day located next to each other at Jamnagar in the western state of Gujarat. They have the ability to process cheaper, lower grades of crude into high-value products for use in Europe and the U.S.

Reliance will have to deal with a smaller refining margin as demand for fuels in Asia slows. Earnings from making diesel in Singapore, an Asian benchmark, this year will be the lowest since 2011, according to Wood Mackenzie Ltd.

Profit from making diesel in Singapore averaged $16.15 a barrel in the quarter, compared with $16.52 a year earlier and $17.86 a barrel in the preceding quarter, according to data from PVM Oil Associates Ltd. in London. On July 9, it fell to the lowest since December 2010, according to the data.

Reliance shares have gained 9.1 percent this year, compared with a 21 percent increase in the benchmark S&P BSE Sensex. The explorer and refiner is the worst performer on the index in the past month.

Spending Plan

The company plans to spend 350 billion rupees in the year ending March as part of its 1.8 trillion rupees expansion plan, Chief Financial Officer Alok Agarwal told reporters in Mumbai yesterday. Lower interest cost and improved refining margin in the first quarter helped boost profit, he said.

The refiner had 815.6 billion rupees of cash and equivalents as of June 30, invested in mutual finds, government securities and deposited in banks, according to the statement. It had debt of 1.4 trillion rupees. Finance costs declined 60 percent to 3.24 billion rupees from a year earlier.

The company also produces natural gas from a field off India’s east coast with partners BP Plc, Europe’s second-biggest oil company, and Canada’s Niko Resources Ltd. The federal government deferred a plan to raise gas tariffs by at least three months to Oct. 1 as it evaluates a formula that prices the fuel at a weighted average of prices in the U.S. and Europe and import costs in Japan and India.

KG-D6 Output

Output from the KG-D6 block fell 15 percent to 42 billion cubic feet in the quarter ended June from a year earlier, Reliance said. Oil production from the block dropped 1 percent to 530,000 barrels and condensate output increased 48 percent to 90,000 barrels in the quarter.

The company also operates stores that sell fruits and clothes and plans to start a fourth-generation broadband service. Reliance will start the $12 billion telecommunications network next year to meet voice and data demand in the world’s second-most populous nation, Ambani told shareholders on June 18.

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