Reliance came with a good Q2 results; above expectations? - Be and make

Reliance came with a good Q2 results; above expectations?

Summary of numbers;
*Sales were up 39.8% Rs 44787 crore versus Rs 32043 crore
*Net profit was up 7.4% at Rs 4122 crore versus Rs 3837 crore.
*Refining margins growth at 7.6% Vs 9.3% QoQ
*Refining margins GRM USD 13.40 per barrel vs 15.4 per barrel, QoQ

A net profit of Rs4,122 crore for the September quarter for Reliance Industries Ltd (RIL) was almost in line with the median estimate of 15 analysts polled by Bloomberg. Still, some analysts are surprised how the firm has managed to maintain its net profit at June quarter levels of Rs4,110 crore, at a time when refining margins have fallen sharply.

Positives:
1. RIL did much better than expected, since swinging crude prices had hit gross refining margins (GRMs) of oil companies worldwide. Analysts had expected a profit growth of 2% or less, or even a degrowth. But RIL maintained its GRMs at $13.4 per barrel, better than most estimates.
2. Average Asian refining margins represented by the Singapore crack spreads have dropped by more than 30% on a quarter-on-quarter basis to $5.60 (Rs278.88 today) a barrel in the September quarter. In Reliance’s case, however, gross refining margins have fallen by less than 15% to $13.40 a barrel. As a result, profit of the refining division fell by 8.8% sequentially to Rs2,774 crore.


Negatives:
1. The profit growth was sluggish considering the 20% plus growth RIL recorded in many preceding quarters.
2. Despite good GRMs, analysts blamed poor profits on the company’s lackluster performance in petrochemicals, where its EBIDTA was lower by 6.3% and margins by 3.4%.
3. RIL’s operating margins fell by 358.63 basis points to 14.46% last quarter from a year ago. Interest cost rose 70.04% to Rs 437 crore, and depreciation cost rose 11.96% to Rs 1,264 crore.
4. Four analysts tracking the three state-owned refiners told that the refinery margins — the difference between the purchase cost of crude oil and selling price of petroleum products — would fall by between $2 and $6 per barrel. It takes anywhere from 20 to 30 days to take delivery of crude oil after an order is placed. Thus, a sharp fall in prices — as it happened in the September quarter — would adversely affects refiners who had purchased it. When the prices are only increasing, refiners would earn more like it happened in the three months up to June 2008.
5. The lower refinery margins are primarily due to a loss in the value of the oil and oil products these companies hold. The companies bought oil at record-high prices but the value of this oil fell by the time it reached the Indian shores as global oil prices have dipped by over 50 per cent in the last three months.
6. Moreover, the difference in prices between oil and petroleum products has narrowed. While oil prices have fallen around 50 per cent in the last three months, the prices of petroleum products have dipped by 55-60 per cent. This is another reason for the fall in margins.
7. Needless to say, there’s more pain to come. According to an analyst, Singapore crack spreads have hit levels of about $2 a barrel this month and the outlook continues to be weak because of the global slowdown. That this has come at a time when it subsidiary company, Reliance Petroleum Ltd, is just coming on stream is a negative.

Short term out look (1-3 months):
It clearly states that in the Q3FY09 the refining margins are at us2$ means there is a decrease in margins. OPEC is also trying to cut the production to maintain the crude in the range 60-75$ which is a very negative news for the refining companies.

Technically some bounce will come due the results are better than expected and in the market also there is due for the pull back. Use this pull back rally to review your holdings in RIL. As RIL moves up in this pull back rally at higher levels huge selling will come and will push the stock to the new lows.

RIL’s outlook looks positive only after the recession fears disappear so that demand to crude will come globally till that RIL will under perform and even investors willing to buy this stock should hold it for 2-3 year period. Then they can be fetch good returns in this counter but for short term RIL is an underperformer.

Levels to watch out for:
As the news entices the investors to go for it and will be trapped in it for short term. Big goons will start to unwind their positions very smartly.
At 1350 is the first shorting opportunity and it goes above this then 1610 is to be watched carefully.
Supports will be at 1210/1140/960. The stock should not go beyond this under the normal circumstances.

Conclusion:
Better to avoid the refinery stocks till the recession fears vanish. No need to go for bottom fishing or for shorting also at the CMP.

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With thanks
Be and make