beyondbrics

India’s largest company by market cap posted a dramatic drop in quarterly profit – its first in more than two years and much worse than expected – days after it announced a share buy-back designed to shore up investor confidence.

Reliance Industries (RIL), controlled by Mukesh Ambani – India’s richest man (pictured) – saw refining margins and output from offshore natural gas fields shrink in the quarter ending December, 2011, leading to a 13.6 per cent drop in net profit to $882m, compared with the same period the year before – and a fall of 22 per cent drop from the preceding quarter

Ambani, chairman of the $50.2bn textiles-to-petrochemicals conglomerate, pinned the lacklustre earnings on gloom in the global economy:

“The global nature of our businesses and weakness in economic conditions resulted in reduced earnings in the quarter, particularly in our refining and petrochemicals businesses,” he said in a statement. “Notwithstanding these challenges, Reliance has delivered reasonably robust results… Our focus remains on enhancing shareholder value by leveraging an exceptionally strong balance sheet… and investing prudently in future growth engines.”

Analysts were not impressed.

“The results were more disappointing than expected and significantly below estimates across all three segments [refining, oil and gas, and petrochemicals],” said Prayesh Jain, oil and gas analyst at IIFL Capital.

The company’s earnings outlook for 2012 remained subdued due to lower refining margins, analysts said. However, the company’s credit rating remained stable on the back of a strong balance sheet.

“The drop in earnings happened because of lower refining margins in this quarter… and these will be continue to be lower in 2012 not just for Reliance, but across the industry,” said Abhinav Goel, senior director at Fitch, the ratings agency. “In terms of earnings in 2012, [RIL] will remain subdued, and it will not do as well as it did in 2011. However… the company’s credit outlook remains stable because of their strong balance sheet.”

At a meeting on Friday, RIL’s board approved a plan to use its excess cash – currently in the vicinity of $12bn – to buy back 3.6 per cent of its shares for up to Rs100.4bn ($2bn). Analysts said the move was partly at bolstering its stock, which lost 35 per cent of its value last year.

Analysts said the move was a short-term tactic aimed at bolstering its stock, which lost 35 per cent of its value last year due to lower-than-expected output from gas fields, and a perception that the company could be doing more to acquire overseas assets with its cash stockpile.

“The fall in Reliance’s share price in 2011 has to do with lower-than-expected output from their KG-D6 gas fields… and the perception that they’ve been building a cash pile but not doing anything with it,” said one analyst who asked not to be named. “They could be using it to acquire assets in Europe and North America but… they haven’t found something that fits their preferences yet.

“The buy-back is a short-term strategy that will indicate to investors that the management believes the share is undervalued and that they will dive in to support it.”

RIL’s stock closed 0.9 per cent higher on Friday at Rs. 792.65.

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