MUMBAI: The new year isn’t likely to bring much cheer to Reliance Industries (RIL). At least that’s what international ratings agencies and investment firms seem to think.
International ratings agency Standard & Poor’s has downgraded the refining behemoth’s earning prospects this year, becoming one of the many that are rather pessimistic about RIL’s earnings, particularly its refining revenues that make up two-thirds of its total sales.
Deutsche Bank, which recently reduced RIL’s stock to ‘hold’ and put a ‘sell’ on the stock of its refining subsidiary Reliance Petroleum Ltd (RPL), sees the Mukesh Ambani company’s refining margins halving from those in financial year 2008.
From around $15 per barrel in FY08, RIL’s margins will fall to about $7.5 in fiscal 2010, Deutsche Bank said in its downgrade report in mid-December. This is partly due to low crude oil prices, which are expected to hover around $50 this year too.
As much as Rs 1,00,000 crore of RIL’s projected revenues of Rs 1,50,000 crore this year would come from its refining business, with the manufacture of petroleum-based chemicals such as ethylene, styrene etc accounting for the rest. Deutsche Bank sees RIL’s net profit at Rs 14,600 crore this fiscal and expects this to fall to Rs 11,100 crore in FY10.
“We are cutting refining margins based on weak demand and the current trend in lower product spreads that may persist until the global economy and refining fuel demand pick up,” Deutsche said in the note.
The bank has also cut by 30% its forecast for RIL’s consolidated revenues in FY10 due to the dropping margins and weak demand for petrochemicals, which account for nearly a third of the company’s sales. Deutsche said it believes that the petrochemical sector is in “one of its worst downturns since the 1980s”, which is likely to continue till 2012.
While not as pessimistic as Deutsche’s, Standard & Poor’s projections too indicated a downward spiral. Pointing out that refining margins had already dropped to $13 by the September quarter, the agency said, “We project refining margins to decline further to $9-10 per barrel in the near term.” S&P said that RIL’s debts, which had been balanced out by its robust earnings, are likely to become more prominent now that revenues are starting to slide.
“The downturn in commodities and oil refining due to the global economic slowdown has affected profitability. This is expected to weaken the company’s cash flow measures, including adjusted debt-to-Ebitda (earnings before interest, taxes, depreciation and amortisation) rising above 2.5 times in the near term, which is higher than our earlier expectations of about 2 times,” S&P said.
The agency warned that it will further downgrade the stock if the measure remains above 2.2 “on a sustained basis”.
S&P added that it would return the outlook to ‘stable’ from the current ‘negative’ if RIL shows limited impact of the commodity downturn or manages to reduce debts by using its cash flows to pay them off.A way out for RIL, however, could be the possibility of early commencement of gas sales, say analysts. Nearly $50 billion worth of gas is trapped in RIL’s legal wrangle with Reliance Natural Resources Ltd (RNRL) over the Krishna Godavari basin exploration block. The next hearing in the case is on January 12.
