RIL hopes its double-digit GRM will continue to hit the sweet spot

Mumbai: Reliance Industries Ltd’s (RIL) third-quarter report card may not have had the stock market excited, but the energy company expects its gross refining margins (GRMs) to stay in double digits going forward.

GRM is what a refiner earns from turning every barrel of crude oil into fuel. RIL announced its third-quarter results on 16 January.

During the quarter, RIL's GRMs stood at $10.8 per barrel, against $10.1 in the second quarter and $11.5 a year ago. Though it reported a $4.1 per barrel premium to Singapore complex margins, it was the lowest in the past three quarters. Singapore GRMs came in at $6.74 per barrel.

“This is our eighth consecutive quarter of double-digit GRMs and double-digit GRMs are good,” said Srikanth Venkatachari, Reliance’s joint chief financial officer, after the company’s earmings conference.

Srikanth added that he sees the GRMs sustained at these levels going forward. “As a refinery, we are seeing a demand growth for products. The underlying demand trends are good. When you look at the demand for refined products and the supply for the same, clearly, demand outstrips supply. Our own outlook is that we continue to think that the refining environment is in a good spot.”

“(RIL) Management expects GRM to remain strong as net refining capacity addition of 5 million barrels of oil per day (mbpd) over the next five years will lag demand growth of 6 mbpd. In the medium term too, fuel demand growth of 1.3 mbpd in CY2017 shall surpass refining capacity addition, thereby keeping margins firm. Also, strong demand growth from Asia (especially India and China) and refinery closures in Europe will support GRM,” said Axis Capital in its research report dated 17 January.

Refining and marketing and petrochemicals form over 95% of RIL’s profit. RIL reported a 3.6% increase in its consolidated net profit at Rs7,506 crore for the three months ended 31 December from Rs7,245 crore a year earlier. Consolidated revenue came in at Rs 84,189 crore against Rs 72,513 crore a year earlier.

Goldman Sachs in a report dated 17 January said it expects RIL’s refining margins to outperform peers.

The company refined 17.8 million tonnes of crude oil during the quarter, lower than the 18 million tonnes a year earlier, following a five-week shutdown at a catalytic cracking unit. The company operates two refineries in Gujarat, with a combined capacity of 1.24 million barrels a day. RIL’s two refineries in Jamnagar help it process cheaper crude, boosting its refining margins.

RIL, which has invested heavily in expansion of its core projects, will see the expansion paying off from FY18. Analysts expect GRMs to be boosted by $0.7-$0.9 per barrel by the commissioning of the expansion of its core projects.

"RIL’s grandiose $50 billion capex programme is nearing completion and will effectively double its gross block by FY18 estimated. About 35% of the overall capex was incurred towards core businesses—refining, petrochemical—off as cracker ($5bn); petcoke gasification ($5bn); and US ethane imports ($1.5bn) are on track for commissioning from January 20117 to end CY17.These should further enhance GRMs and petrochemical margins," said Edelweiss Securities Ltd in its report dated 16 January.

Investment in petcoke gasification will help RIL meet its entire fuel requirement at the refineries and eliminate its petcoke production of 6.5 million tonnes a year, generated from two of its cokers. The technology for petcoke gasification will help RIL produce 23 mscmd (million standard cubic metres a day) of syngas and will aid in reducing R-LNG (regasified liquefied natural gas) intake for its refineries.

“In the analyst meet, the company highlighted plans to raise the utilization rate for its downstream refining units, which along with term contracts on heavy crude, should help cushion the impact from potential reduction in crude discounts. The company highlighted its flexibility to move product yields by 10-15% which we believe should support GRMs as we see diesel margins outperforming gasoline in 2017," said Morgan Stanley in its report dated 17 January.