Strong refining performance sent Reliance Industries Limited's, or RIL, March-quarter net profit vaulting 8.5% higher than a year ago, to Rs
63.8 billion, consistent with our estimate. Crude and product prices had fallen sharply in the prior quarter.
Planned shutdowns in some Middle East and Asian refining and petrochemical plants led to tighter supply and stronger product prices. This has led to expansion in refining and petrochemical margins, which has shielded profits from the effects of lower product prices. Higher diesel and naphtha spreads, and favorable crude oil differentials, pushed refining operating margin wider, to 8.7% versus 4.1% a year ago.
Refining operating profit rose 24%, to Rs 49 billion. Petrochemical margins rose to 9.2% versus 8.1% a year ago, but lower product prices drove a 7% decline in operating profit, to Rs 20 billion.
The upstream segment was a drag on returns, as lower gas prices in U.S. shale and lower gas production in India sent operating profit 35% lower, to Rs 4.9 billion.
We believe Asian petrochemical and refining capacity will remain plentiful, and we see incremental supply coming back in the market from May. Despite the strong result, we see no reason to change our 9% long-term operating margin assumption for petrochemical. We raise the 5-year average annual refining margin assumption to 5.7% from 4.5%, with 1,400 fuel outlets opening in fiscal 2016, and a slightly better product spread outlook.
However, this benefit is largely offset by lower expected returns in oil and gas, with the reduction in our long-term price forecasts and higher capital expenditure in telecom business.
Our fair value estimate remains Rs 950 per share. We retain our no-moat and high uncertainty ratings.
Petrochemicals and refining are commodity-input and commodity-output businesses, highly fragmented, and fiercely competitive. Reliance buys globally traded crude and does not enjoy a low-cost feedstock.
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