Ever since RIL's stock started rallying earlier this month, suddenly every News channel was repeatedly shouting that RIL is expected to report it's best ever Quarterly Net Profit with a sharp increase in Gross Refining Margins (GRMs) to around the $10 per barrel mark. And boy, did RIL disappoint??!! Not a All. Reliance Industries Ltd did post a record Quarterly Net Profit figure of Rs.6381 crores, which was 21% higher Q-o-Q, but just 8.5% higher Y-o-Y. RIL's Q3 Net Profit was expected to be lower because of the Inventory losses arising from sharp fall in Crude prices. In fact I would rate RIL's Q3 to be superior than Q4 because the company still managed to post a healthy profit figure despite huge Inventory losses.
In Q4 RIL did not face any further Inventory losses, was able to buy Crude at very low prices and the end-product prices were coming down at a slower pace compared to Crude prices, which was expected to boost the margins enjoyed by most Crude Refiners & RIL being the most efficient Refiner was expected to be the biggest beneficiary. The end result was RIL managing to earn record margins in it's Refining business, which is also the biggest contributor to RIL's revenues & profits. Have a look at the chart below which shows the Quarterly EBITA & Net Profit Margin percentages over the last many quarters:
The chart clearly tells us the story of Q4. Between March'12 to December'14, RIL's EBITDA margins have hovered in a range of 9% to less than 12%, never above that. In March'15 quarter, it has shot up to a staggering over 17%!!! The story is similar in case of Net Profit margin. It used to be in the 4.5% to 6.5% range until December'14, but shot up to over 9% level in March'15. So the profit margins have been clearly very unusual during this quarter and there is a very high possibility that these margins will come back close to the normal range within the next 1 or 2 quarters.
Don't get me wrong. I am not at all negative about Reliance Industries Ltd's future prospects. The company will continue to do record utilisation levels of it's plants in the Refining & Petrochemicals businesses. It's ongoing CAPEX to expand capacities in Petrochemicals segment and improve efficiencies in the Refining segment is absolutely on track and is expected to boost the company's margins by about 2% over the normal operating range. But I don't want investors to get swayed by this Record Net Profit figure posted this quarter. Remember than the input as well as end product prices of RIL's Refining & Petchem businesses are nearly 30% to 40% lower than what they were a year ago. This is expected to keep the company's turnover at levels much lower than last year levels. In such a situation if the company's profit margins come back closer to normal levels, then the company's quarterly Net Profit number could drop considerably from the one posted in Q4-FY'15.
But there could be some positives coming from the Oil & Gas business in the coming quarters. Q4 was expected to be the worst quarter for all Oil & Gas producers as the International prices were at the lowest levels of around $50 per barrel mark. Since then the prices have shown signs of bottoming out and any improvement from these levels will boost the profitability of all players in this business. RIL's domestic production volume numbers were disappointing as expected & hence did no good in mitigating the fall expected from lower product prices. But the production from RIL's Shale JVs have shown handsome growth, continuing the trend from earlier quarters. The increased production helped arrest the drop in turnover from this business segment, but the profitability was expected to be impacted & so it did. EBIT margins from this segment were about 10% lower than normal, but we can say that worst is behind if the crude prices don't fall to levels lower than that seen in Q3 & Q4. As mentioned earlier, any improvement in crude prices coupled with increased production volumes will boost the company's turnover & profits from this business over the numbers posted in Q4.
Coming to RIL's Retail business, it was slightly on the surprising side. Q3 of every year has lot's of festivals compared to other quarters and hence the sales recorded by any Organised Retail company is generally higher in Q3 than in Q4, especially in the Same-Store-Sales comparison. This year RIL's Retail business has managed to post some bit of Q-o-Q growth in Q4 over Q3 and this is excellent news. It's planned expansion seems to be working well and FY'16 will be much better both for turnover growth & improved profitability. The Retail business will also be benefiting from the launch of RelJio's Telecom business, as and when it happens.
Unfortunately, there is not much news regarding when the 4G launch will happen. As per law, RIL needs to have a operating network presence in 80% of urban centres & 50% of rural centres within 5 years of receiving it's spectrum. The 5-year period for the 2300 MHz band spectrum ends sometime in August-September'15 and hence everybody is expecting the company to start doing commercial roll-out from the current quarter. But things have become a little bit more complicated with the company aggressively acquiring spectrum in 1800 MHz & 800 MHz bands in the last 2 spectrum auctions. These acquisitions will certainly involve substantial changes in the roll-out plans of the company. Let's just wait & watch how RelJio's launch pans out, hopefully soon.
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