Select analysts turn bullish, as unregulated businesses might drive 90% of incremental Ebitda over FY12-17
Reliance Industries Ltd (RIL) has regained its position as the country’s largest company by market capitalisation, as its shares jumped six per cent on Monday. While the consensus view on the stock is not bullish, some domestic brokerages have a contrarian view on the company. This divergence is also seen among the big investors. While domestic institutions are bullish on the stock and their holding in the company has risen, data suggest foreign institutional investors have pared their holding in the company at the end of the June quarter.
Over the last one year, RIL’s shares have languished, as gas production has fallen and profitability of the other businesses has come under pressure. The company has been struggling to get further approvals for its upstream business from the government. As news trickled in on Monday that RIL had agreed to share KG-D6 accounts with the CAG, under the terms of the production sharing contracts, the stock price moved up.
Edelweiss Securities, which has an anti-consensus ‘buy’ on the stock, in a note on Monday said: “Progress on RIL’s upstream investment has been held up for a long while due to lack of approvals, and we see the easing of tensions between RIL and the government to lead to greater visibility on timelines of field development and subsequent production.” Analysts who met the management on Monday said the company has said it plans to file a field development plan for KG-D6 in the third quarter and the fourth quarter, and a consolidated field development plan (including satellite fields).
The market has been particularly negative on the stock, as exploration & production is the most profitable business segment and it has seen output dwindle. Any ramp up in production from the D6 block, including the current D1, D3, D26 and the R-series, can happen only three-four years after getting all approvals from the government. So, a section of the market is still not so optimistic on this segment.
However, Edelweiss Securities believes “despite all the noise around E&P, non-regulated businesses will contribute 90 per cent of the FY12-17 incremental Ebitda, driven by refining, chemicals and investments in shale gas.” Margins in the refining business are expected to increase, driven by “product optimisation and increased ability to process heavier crude,” claim analysts. Refining capacity closures across the world would offset fresh capacity additions. The contrarian view on the stock is also driven by the outlook on shale, expected to contribute 39 per cent of the incremental Ebitda on a 50 per cent compound annual growth rate production over FY12-17. In either case, it indicates that fortunes of the non-regulated and E&P businesses should not get worse.
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