Reliance Falls to Lowest in Two Years as Profit Slows

By Archana Chaudhary

Oct. 24 (Bloomberg) -- Reliance Industries Ltd., India's largest publicly traded company, declined to the lowest value in two years in Mumbai trading after reporting profit growth in the second quarter was the slowest in at least 10 quarters.

Reliance dropped 71.15 rupees, or 5.8 percent, to 1,146.5 rupees at 12:11 p.m. local time, the lowest since Oct. 12, 2006. The shares fell as much as 8 percent earlier.

Refining margins are falling as fuel prices decline faster than those for the crude oil used to produce them. Reliance is expected to complete the world's biggest refining complex next month, almost doubling capacity, when the worst financial crisis since the 1930s is cutting global fuel demand.

``Reliance's refining margins may remain depressed over the next couple of years although profit numbers were more or less in line with what was expected,'' said Jayesh Shroff, who helps manage the equivalent of $2.4 billion in equity at SBI Asset Management Co. in Mumbai. ``This is a short-term concern.''

Profit from processing every barrel of crude oil declined to $13.4 from $15.7 a year earlier, the company said yesterday. Crude oil prices are expected to fall to $50 a barrel, extending the 47 percent slump in three months and reducing profit from turning each barrel of oil into gasoline and diesel.

Net income in the three months ended Sept. 30 rose to 41.2 billion rupees ($827 million), or 28.4 rupees a share, from 38.4 billion rupees, or 26.4 rupees, a year earlier, Reliance said yesterday after the markets closed. Net sales rose 40 percent to 447.9 billion rupees.

New Refinery

The group is expected to start operating an export-oriented, 580,000-barrel-a-day refinery being built adjacent to the existing 660,000-barrrel-a-day plant by next month end, the government said. The units will together form the world's largest refining complex, according to Reliance.

Reliance has so far spent $5.2 billion on building the new unit, which is in an ``advanced stage of completion,'' the company said on Oct. 21.

The refinery may reach full production capacity by the end of the first quarter next year, adding about 300,000 barrels a day to global diesel supplies, Merrill Lynch & Co. said in a report dated Oct. 1.

Gasoline and diesel margins for refiners in Europe and the U.S. may decline when Reliance's new plant starts production this year, according to a Bernstein research report released in June. The refiner may export gasoline and alkylate to the U.S. West Coast in summer and to Asia in the winter, while supplying low- sulfur, less-polluting diesel to Europe, Bernstein said.

Share Decline

``The management expects pressure on margins and demand growth in the refining-petrochemicals segments as a result of the global recession over the next one year,'' S. Ramesh, an analyst at Deutsche Asset Management India Pvt., said in a note to clients today.

Reliance shares have declined 60 percent so far this year, eroding the wealth of Chairman Mukesh Ambani, who was ranked the world's fifth-richest by Forbes in March. The shares declined 7 percent in the second quarter.

Ambani bought 120 million shares in Reliance Industries on Oct. 3, paying $3.6 billion in India's largest warrant conversion. The company allotted the warrants to Ambani in February 2007, entitling him to buy shares at 1,402 rupees apiece in 18 months.

Reliance, which started producing oil from its largest gas field, in the Krishna-Godavari basin off India's east coast, last month, is expected to start producing natural gas in January.

Ambani is investing $5.2 billion to develop the D6 field that may hold as much as 9.2 trillion cubic feet of gas, according to partner Niko Resources Ltd. The area is expected to more than double India's gas output after production starts by January. Reliance's production will increase to 550,000 barrels of oil equivalent a day in the next six quarters and boost the nation's output by 40 percent, Ambani said on Sept. 21.

Oil and gas production from the Krishna-Godavari basin will save India $20 billion in foreign exchange, Ambani said.

To contact the reporter on this story: Archana Chaudhary in Mumbai at achaudhary2@bloomberg.net.