Earnings preview: RIL’s Q3 inventory gains may surprise investors

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Intelligence group: Reliance IndustriesBSE -0.56 % is likely to post a sequential increase in standalone profit for the eighth quarter in a row, helped by the world’s largest refinery in a single location that it owns, coupled with a sharp improvement in regional refining margins.

The standalone profit is expected to increase 2% Q-o-Q and 8% Y-o-Y to Rs 7,820 crore for the December 2016 quarter. RILBSE -0.56 % is India’s largest private sector player in terms of profit, and the company is expected to announce its quarterly results on Monday . The bottomline of refining companies is likely to get an upshot as Sing apore Gross Refining Margin (GRM) -a gauge for regional refining margins -had increased by $1.6 per barrel se quentially to $6.7 per barrel in the third quarter of FY17.

This was due to an improvement in realisation of most petroleum products such as gasoline, diesel, and fuel oil. RIL’s GRM is also expected to grow sequentially and is likely to reach $11.3 per barrel in the December quarter compared with $10.1 in the previous quarter.

Gasoline and diesel comprise more than two-third of RIL’s total refinery product output. The GRM premium between RIL’s GRM and Singapore refining margins is likely to narrow down slightly from the previous quarter as it does not produce fuel oil. Refinery throughput is expected to decrease slightly due to a maintenance shutdown in the company .

Also, there could be an element of surprise in the GRMs from inventory gains. The crude oil prices increased $9 per barrel in absolute terms during the quarter, which may translate into some inventory gains. This happens when a company makes higher profit because of increased crude-oil linked prices of end products made with raw materials bought earlier at lower prices. The operating profit for the refining segment is likely to improve 13% QoQ to Rs 6,690 crore. The improvement in the refining business, which accounts for nearly two-third of its revenues and profit is likely to offset the lower profitability derived from the petrochem segment.

The price of polymers d ropped by 3 % in the December quarter, and volume growth is likely to be subdued due to demonetisation.The operating profit for the petrochem segment is likely to decline 13% to Rs 3,010 crore.

RIL’s stock has been an outperformer in an otherwise weak market over the past three months. Despite its stock trading closer to its long-term average multiples, it has not been able to win investor interest due to the uncertainty surrounding its telecom business’s profitability