Reliance Net Beats Estimate as Interest Income Surges

Jan. 22 (Bloomberg) -- Reliance Industries Ltd., India’s biggest company by market value, posted earnings that beat estimates as interest almost quadrupled, offsetting lower demand for fuels and petrochemicals caused by the global recession.

Net income dropped 9.8 percent to 35 billion rupees ($713 million), or 23.5 rupees a share, in the three months ended Dec. 31, the refiner and explorer said in a statement in Mumbai. The median estimate of nine analysts was for a profit of 31.2 billion rupees. Sales fell 9.3 percent to 325.3 billion rupees.

Earnings growth may accelerate after billionaire Chairman Mukesh Ambani started the company’s second refinery on Dec. 25 and is close to beginning gas production at India’s biggest field. Interest income surged after the company invested cash from additional shares bought by Ambani in bank deposits.

“Other income seems to have boosted their third-quarter earnings helped by the capital introduced by the promoters,” said Ballabh Modani, Mumbai-based analyst at Enam Securities Pvt., whose profit forecast of 33.5 billion rupees was the closest to the result. Modani has an “outperform” rating on the stock.

Interest income rose to 5.46 billion rupees from 1.41 billion rupees a year earlier. Cash reserves rose to 258 billion rupees after Ambani bought 120 million Reliance shares. More that 95 percent of the company’s cash is held in fixed deposits, according to the statement.

Warrant Conversion

The chairman paid $3.6 billion to buy shares in India’s largest warrant conversion on Oct. 3. The company had allotted the warrants to Ambani in February 2007, entitling him to buy shares at 1,402 rupees apiece in 18 months.

Ambani still needs to convince investors that his new refinery and gas sales, currently banned by a court, will boost profit. Reliance shares have dropped 52 percent in a year, more than the 47 percent decline in the Bombay Stock Exchange’s Sensitive Index.

The drop in third-quarter profit was the first in three years. In the first nine months, net income rose 3.4 percent to 117.3 billion rupees on sales of 1.22 trillion rupees.

Earnings in the year-earlier period excluded gains from an asset sale. Including the one-time gain, net income was 80.8 billion rupees.

Reliance earned $10 on every barrel processed at its 660,000 barrel-a-day plant in Gujarat, the company’s first refinery, compared with $15.4 a barrel a year earlier. Margins at complex refineries in Singapore, Asia’s biggest oil trading centre, were $8.4 a barrel in the week ended Dec. 26, according to a Bank of America report.

Refining Margins

Margins have narrowed as gasoline and diesel prices fell because of a slump in global demand. Prices of fuels including gasoline and naphtha are lower than the oil from which they are produced. Exports account for 70 percent of Reliance’s revenue.

The price of wholesale gasoline loaded on barges near Amsterdam was as much as $7.98 a barrel lower than North Sea Brent crude oil in the three months ended Dec. 31, according to data from broker PVM Oil Associates Ltd.

Falling demand has prompted U.S. refiners, including Valero Energy Corp. and Exxon Mobil Corp., the world’s largest oil company, to reduce runs and shut units for seasonal maintenance.

Mumbai-based Reliance operates complex refineries, which use advanced technology to convert cheap, high-sulfur crude and low- quality products such as fuel oil into gasoline and diesel. Almost no oil is wasted.

‘Slower Demand’

Refining accounted for 45 percent of Reliance’s pretax profit in the third quarter, while oil and gas contributed about 15 percent.

“Refining margins are expected to remain muted till the end of 2010-11 due to overcapacity concerns and slower demand growth,” said Niraj Mansingka, assistant vice-president at Edelweiss Capital Ltd. in Mumbai. “Gas production will offset most of the decline.”

Reliance shares, which declined 37 percent in the third quarter, rose 1.5 percent to 1,136.3 rupees in Mumbai. The earnings were released after the market close.

Reliance’s gas project and new refinery may help the company achieve 66 percent earnings growth in the next two years, Harshad Katkar and Nirmal Raghavan, Mumbai-based analysts at UBS AG, said in a Jan. 19 report.

Ambani is investing $5.2 billion to develop the first phase of the KG-D6 field in the Krishna-Godavari basin, off India’s east coast. The area may hold as much as 9.2 trillion cubic feet of gas, according to partner Calgary, Canada-based Niko Resources Ltd., making it India’s largest gas find.

Gas Lawsuit

The sale of gas from the field has been banned by the Bombay High Court, which is hearing a price dispute between Reliance and its customers, state-owned NTPC Ltd. and Reliance Natural Resources Ltd. The Indian government has asked the court to lift the ban to help overcome shortages of the fuel faced by power utilities and fertilizer makers.

Reliance declined to comment on gas sales because of the lawsuit, the company said in an e-mailed reply to questions on Jan 20.

UBS expects Reliance to start gas production by the end of this quarter after the court passes an interim order allowing sales, analysts Katkar and Raghavan wrote.

Reliance’s new refinery cost 262.2 billion rupees and is 5 percent owned by Chevron Corp. Along with the adjacent, older plant, it is the world’s largest refining complex, according to the company.