We are pleased with the March quarter results of Reliance Industries Ltd, or RIL. Net profit of Rs 63.8 million was in-line with our estimate of Rs 64 billion.
A higher fall in prices of naphtha as feedstock versus product prices helped in boosting petrochemical margins to 9.2%, as against 8.1% a year ago. A higher gasoline spread and favourable crude oil differentials helped in refining margin expansion to 8.7% versus 4.1% a year ago.
Oil and Gas was a dampener where the operating margins plummeted to 19.5% versus 27% a year ago. Lower gas prices have lowered the returns in the U.S. shale business while Indian gas business continues to suffer from poor operating leverage owing to lower gas production.
In our view, the favourable spreads in refining and petrochemical have been supported by planned shutdowns by some refining and petrochemical plants in Middle East and Asia. As they start coming back in the production from May, we expect spreads to show moderation from current elevated levels. Our long term assumptions of operating margins of 4.5% for refining and 9% for petrochemical margins are tied to our view of limited upside to margins as Asian petrochemical and refining industry will remain well supplied over our five year forecast period.
We maintain our fair value of Rs 950 per share. The result was largely immaterial and therefore, will not cause any change to our moat rating and fair value. RIL remains no moat rated with the global refining business highly fragmented and fiercely competitive. Cost advantage through a low cost feedstock is the key source of competitive advantage for a refiner yet RIL buys globally traded crude. Refining and petrochemicals are highly commoditised and cyclical industries, as reflected in our high fair value uncertainty rating.
