Why Dalal St is unhappy with RIL's Q1 results

Shares of Reliance Industriesfell in morning trade even though the Mukesh-Ambani owned firm's June quarter results met estimates.

The disappointment can largely be attributed to the quality of results since the 19 percent rise in profits was the result of higher other income rather than improvement in margins.

While the market was expecting an improvement in petrochem margins due to government action on tariffs and a pick-up in demand in China, the segment revenue remained flatat Rs 21,950 crore, against Rs 21,839 crore during the June 2012 quarter

Meanwhile, the company's gross refining margins which came in at $8.4 per barrel was higher than $7.6 a barrel in the same period last year, but was lower than the previous quarter's $10.1.

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Another reason for the stock slump today is that it has already rallied about 7.6 percent this year after the government decided to increase gas price from April 2014. The company has, however, clarified that its gas production will not increase from the current levels until 2017-18.

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Last week, the government had said RIL's KG-D6 gas output was less than 14 mscmd now, which is less than a fifth of the peak volume of over 69 mscmd achieved in June 2010.

Sales also declined 4.5 percent year-on-year to Rs 87,645 crore due to lower output from KG-D6 basin which has recorded a 50 percent decline to around 15 million standard cubic metres per day.

RIL's refining business revenue, which comprises three-fourth of its kitty, too fell to Rs 81,458 crore as its Jamnagar refinery processed less crude this quarter.

Other Income

RIL's other income for the quarter soared 33 percent compared with the year-ago period to 2,535 crore, a historic high led by profits on sale of investments in fixed income instruments and higher average liquid investments, which helped the company report an 18.9 percent jump in profit at Rs 5,352 crore on a year-on-year basis.

Kotak Institutional Equities in a report said that Reliance's other income is covering up for its "middling" operating performance as its operating profit declined 9.6 percent due to lower refining margins and a fall in production.

According to market analyst SP Tulsian the company's other income as interest income of Rs 1,628 crore and other unallocable income rate of expenditure at Rs 569 crore actually played spoil sport since it implies that the bottom line has just increased marginally.

"On a consistent basis, the company has an expense of about Rs 70-80 crore every quarter as other unallocable expenses, number one. Number two, if you really see the interest income, they have been earning consistently of Rs 2,000 crore every quarter. If it has corrected to Rs 1,600 crore, it too gives an alarming signal as on the one hand, the interest expenses have increased by Rs 100 crore. On the other hand, there is a reduction by Rs 400 crore. That Rs 20,000 crore or $ 3-3.5 billion must have been spent on that capex because the huge capex is only going on right now in the petchem segment. So, I think both this items needs to be examined very critically," he said in an interview with CNBC-TV18.

In other words, it is this unallocable income that has actually bloated the bottom-line without which profits would be up only 6 percent.

Shares in Reliance, India's second biggest company by market value, traded 2 percent lower at Rs 905 at 9:41 am.

According to Jagannadham Thunuguntla, Head of Research at SMC Global, the real rally in Reliance will only occur next year when the company actually announces any gas production fund.

The oil major will invest $5.1 billion (Rs 30,290 crore) in the next three years in its US shale gas business, taking the total investment in the business to $10.8 billion.

The Mukesh Ambani-promoted conglomerate acquired shale gas assets in the US in 2010 for $3.45 billion and has invested $5.7 billion in shale gas joint ventures till the June 2013 quarter.