Reliance Ind: Petrochem biz underperforms

Even as the oil refining business posted a strong performance in the third quarter ended December 2007, Reliance Industries’ petrochemicals business was an underperformer.

Revenues from petrochemicals dipped 3.3 per cent to Rs 12,706 crore while earnings before interest and tax, at Rs 1,778 crore, was almost the same as in the third quarter of last fiscal.

Profitability of the petrochemicals business shows a dipping trend on a sequential basis. Earnings before interest and tax from petrochemicals was down by a good 12.19 per cent in the third quarter compared to the second, ended September 2007. Revenues were also down almost 2 per cent over the same period.

The company seems to have been hit on both volumes and realisations. Production of petrochemicals was down 1.51 per cent during the third quarter with polymer production remaining stagnant at 8.52 lakh tonnes. The sustained high price of naphtha, a basic feedstock for the production of petrochemicals, affected margins in the case of specific products such as polyethylene.

The underperformance of the petrochemicals business was counterbalanced by an extremely strong performance in the refining segment where revenues grew by a good 25.31 per cent to Rs 26,154 crore while earnings surged by 35.79 per cent to Rs 2,614 crore. The exceptionally high refining margin of $15.4 per barrel that Reliance enjoyed during the quarter was responsible for driving the performance of the refining business.

Also aiding the overall performance of the company was the appreciation in the rupee which helped drive down interest costs on its dollar denominated debt. Interest and finance costs dipped by a generous 17.32 per cent to Rs 253 crore during the quarter.

The trend of a strong performance in refining and an average one in petrochemicals is likely to continue in the fourth quarter.

Oil prices are projected to remain strong in the near term which is good news for the refining business of Reliance but bad for petrochemicals. Margins in the latter business are likely to stay under pressure in the near term.