RIL understated profits fearing windfall tax: SP Tulsian

Reliance Industries has posted 13.2% growth in its net profit at Rs 4,110 crore for the quarter ended June 2008 as against Rs 3,630 crore in the same period of last year. Gross refining margin, or GRM stood at USD 15.70 per barrel. Petro-chemicals revenues went up by 12.7% at Rs 14,871 crore and EBIT margin improved by 10.6% from 10.4% (QoQ). Refining revenues were up by 45.9% at Rs 32,587 crore and EBIT margin declined by 9.3% versus 9.9% (QoQ).

SP Tulsian of Sptulsian.com said results of the refinery segment look disappointing. According to him, the company seems to have understated profit mainly fearing windfall profit tax on the refinery segment.

According to Jigar Shah, Senior Vice-President and Head of Research, KIM ENG Securities, there was a lot of volatility because of rising raw material prices. "That has resulted in refining margins being lower than what was expected. The way crude prices had shot up, the expectation was that GRM for the quarter would be higher on a sequential basis."

Excerpts from CNBC-TV18’s exclusive interview with SP Tulsian and Jigar Shah:

Q: Would you call it a disappointment?

Tulsian: The results from the refinery segment look disappointing. The Rs 3,040 crore EBIT is Rs 2,839 crore if compared sequentially, which means it has just increased by Rs 200 crore. Q4 had a realisation of less than Rs 40 per dollar. This quarter has seen a higher currency rate of at least Rs 42. So, even a 4% currency benefit is not factoring in profitability.

There has been a steep increase in the price of crude. The company always carries inventory of about Rs 14,000 crore. So, even if I presume 25%, it works out to about Rs 3,500 crore of crude oil, which should give an inventory gain of about Rs 200-400 crore.

Apart from that, they have seen better gross refining margins, or GRMs, of 20 cents, which should give them an extra profit of maybe Rs 60-70 crore. On the refinery segment, the company seems to have understated the profit mainly fearing windfall profit tax. It does not want to give too rosy a picture that the refinery segment has shown very good profitability. That may attract the attention of the regulator or maybe the government and tempt them to go for windfall profit tax.

Q: Would say that GRMs at 15.7% are an understatement?

Tulsian: Crude prices have risen from about USD 110 per barrel on an average for the March quarter to about USD 130 per barrel. So, there is a proportionate increase in GRMs with an increase in crude prices. If crude rises by about 20%, then GRMs must rise by 10% because they have been refining heavy crude with a high sulphur content. The refinery produces about 1 lakh tonne of sulphur residues every month. It has given them very good realization. Sulphur prices which used to rule at about Rs 2 per kg a couple of years back, is now sold at around Rs 34 per kg.

There has not been a sharp increase in the two quarters on a sequential basis. There has been an increment continually. They have a huge recovery of sulphur. It should give them an extra profit to the extent of about Rs 50-70 crore alone from waste products. If one adds all these things, a Rs 200 crore increase in EBDITA, the refinery segment seems to be understated.

Q: What have you made of the numbers? Would you say that the performance is below par or would you attribute the motive and say that perhaps there is an understatement of profit?

Shah: It is not an understatement. In both businesses, there is a lot of volatility because of rising raw materials. That has resulted in lower refining margins than what was expected. The way crude prices had shot up, expectations were that GRM for the quarter would be higher on a sequential basis.

That has not happened in a very sharp manner because the product mix could have undergone some change. The petrochemical margin fall is very much on expected lines because naphtha prices were ruling high. They would have impacted the company’s overall costing.

Going forward with further availability of gas as feedstock, the overall performance can improve. The second half should be much better, because we also have KG Basin gas coming in. My outlook for the company does not change and excluding KG Basin production, 20% kind of profit growth looks reasonable.

Q: The company should have enjoyed the benefits of a depreciating rupee, inspite of that you are seeing that refining revenues have not lived up to expectations, which is barely Rs 200 crore over the previous quarter. Doesn’t this come as a surprise?

Shah: The rupee appreciation during the April-June quarter has taken a lot of companies by surprise. A lot of export-oriented companies instead of gaining have ended up losing on foreign exchange. So, I am not surprised on that angle because clearly people had not expected such a sharp upward movement in the rupee.

Operating performance seems to be okay. The profit on the refining side has been below expectations. But one quarter is not sufficient to make a judgment and whether that is going to follow in the subsequent period.