Reliance Industries is expected to report a 24 per cent drop in its net profit for the June 2012 quarter as compared to its profit in June 2011.
A report by Bank of America Merrill Lynch (BofA ML) says that the company is expected to report a profit of Rs 4,290 crore (Rs 42.9 billion) as Singapore GRM was at a 19 month low in June 2012 at $5.5 per barrel. GRM for the first quarter of 2012 was at a six quarter low of $6.7 per barrel.
As per BofA ML, Reliance's profit for FY13 is likely to drop by 11 per cent as compared to the previous year. This will be the first big decline for the company since it announced it gas find.
Even during the 2008-12 period the company managed to post a 4 per cent CAGR growth in its profits. Unless GRM and petrochemicals margin improve from the current level it will be difficult for the company to post bottomline growth.
Contribution from its exploration and production is expected to continue to decline till 2014, as was guided by its partner Niko Resources, who had earlier said that gas production is expected to decline by 13 33 per cent.
Reliance will also have to provide to higher depletion, depreciation and amortisation charges (DD&A) which will bring down its profits further. DD&A which is currently at $11.3/boe (barrel of oil equivalent) is likely to rise by $3-5/boe in FY13 due to the steep cut in proved reserves in the producing D6 fields in FY12.
BofA ML says that the ongoing buyback program of the company is expected to continue till its outlook improves. Reliance has underperformed the Sensex by 83 per cent since April 2009. BofA ML argues that the scenario is expected to worsen before it improves. Fair value of Reliance Industries [ Get Quote ] in bear case scenario is Rs 586 as per BofA ML.