Gross refining margins may decline sequentially but improving petro-chem margins will boost earnings
Reliance Industries, for a change, has outperformed the broader markets, rebounding from its closing lows of Rs 810 at the end of March 2015 to Rs 1,007 now. Jio’s launch might have helped, but not so much to boost the stock by 24 per cent in less than four months.
While strong gross refining margins (GRM’s) had led to the initial spike despite weak crude prices, investments in core business that will likely boost earnings in another 18 months has given analysts a reason to turn bullish. Perhaps the market is expecting RIL to do an encore in the June 2015 quarter as well by posting strong performance.
The company had reported GRM’s of $10.1 a barrel in the March 2015 quarter, boosting the street’s sentiments. However, with Singapore complex GRM’s declining by $0.5 a barrel in June 2015 over March 2015 quarter to $8.1 a barrel, it will be interesting to see how Reliance’s GRM pans out.
While analysts expect Reliance’s GRM to come at $9.5 in June 2015 quarter, petchem margins could compensate and provide the kicker. The blended per metric tonne petchem margin is estimated at $343 compared to $285 and $287 in March 2015 and June 2014 quarter, respectively.
And this could lead to a strong June 2015 quarter performance by Reliance. Though sequentially the GRM’s are lower, they will still be higher than $8.7 a barrel reported by Reliance during the June 2014 quarter.
Thus, improved GRM’s on year-on-year basis and pick-up in petrochemical margins is likely to drive RIL’s profitability. Analysts at Jefferies expect Reliance’s EBITDA to improve 20 per cent year-on-year and 4 per cent sequentially as they expect net profit to increase 10 per cent year-on-year.
However, the street has its eyes set on the telecom launch slated in the days to come. The company’s investments in the telecom sector have been one of the major overhangs on the stock in past. Analysts at Motilal Oswal Securities believe that Reliance’s new refining and petchem projects are likely to add to earnings from end-FY18, but telecom business will be a drag on profitability and lead to ROEs of sub-13 per cent. Thus they maintain 'Neutral' rating on the stock for now.
Notably, Reliance’s $30 billion investment cycle is coming to an end in FY16. Business analysts at CLSA expect more than 40 per cent upside by March 2017 from the investments in core energy business.
The company’s $13 billion strategic investments in consumer business represents 25 per cent of its FY15 standalone balance sheet but contributes little to profits and is a drag on its return ratio. However, they add that a successful launch of its 4G mobile services, a pickup in organised retail from a new online offering, and a rampup of its auto-fuel business could boost Reliance’s equity value by $17 billion (less than 30 per cent of its current market cap). Thus taking into consideration upside from core energy business and potential option value of consumer business they have rolled over their September 2016 target price to Rs 1,300.
