Analysts turn bullish on RIL

Stock market analysts believe the worst might be over for Reliance Industries Ltd (RIL). The share price of the Mukesh Ambani-led company will get re-rated after it reported better-than-expected gross refining margins, which resulted in an increase in profits from the core business of refining and higher contribution of profits from shale gas, besides giving early signals of stability in the retail business.

"The stock has limited downside, but may close this calender year at around its annual high levels of Rs 900," said Deven Choksey, managing director of the Mumbai-based K R Choksey Shares and Securities.

The RIL share on Monday closed at Rs 823.20 on BSE, up 0.5 per cent over the previous close, when the benchmark index closed 0.2 per cent higher at 18,713.55 points. The scrip had touched a 52-week low of Rs 671 on May 8 this year. Under-performance of the share price has had a major impact on the overall market sentiment in the country, as the company has a near 10 per cent weightage in the key benchmark equity indices. Analysts had downgraded RIL on falling gas out put in the Krishna-Gidavari (KG) basin off the coast of Andhra Pradesh, after several controversies.

The company on Monday reported a profit after tax of Rs 5,376 crore for the second quarter of the financial year, which was in line with market expectations. Though the profit fell 5.7 per cent in the second quarter, analysts said the company had given positive outlook in business in several fronts.

Choksey says the fact that RIL will get the much required support from another segment like shale gas is a big positive for the stock. "Profits from shale gas has contributed more from KG-D6. The shale gas bet of the company seems to be promising. In the US, it is one of the fastest-growing business since 30 per cent of domestic gas production in the US comes from shale. If RIL develops this segment along with its other core areas, the stock will be a fine fundamental play. Also, the company has said the retail business which is in losses is likely to break even by next year."

For RIL, the US H1 shale gas output tripled in the quarter. The segment contributed profit of around Rs 1,000 crore in earnings before interest tax on a consolidated basis, which is more than earnings coming from KG-D6 that contributed around Rs 800 crore. RIL's revenue from oil and gas business was down 36.7 per cent to Rs 2,254 crore on the back of fall in natural gas output from KG-D6, which was largely believed to be on the back of the government's decision not to review the gas price in the country.

Shale gas is natural gas formed from being trapped within shale (rock) formations. It has become an increasingly important source of natural gas in the US over the past decade, and interest has spread to potential gas shales in the rest of the world.

Another RIL analyst, S P Tulsian, says: "Improvement in the company's core business itself is a major positive for the stock. Going ahead, the petro chemicals business, too, is expected to improve, which could be a direct boost to the company's bottom line."

GRMs for the second quarter were reported at $9.5 per barrel versus $7.6 per barrel by RIL.

"Before looking to anything else, analysts would see RIL's GRM is better than Singapore GRM, which is the standard benchmark for the industry. Don't be surprised if foreign brokerages revise their outlook on the stock based on this,” says Kishor Ostwal, managing director of CNI Global Research.

GRM is a way to represent the economics of a refinery. It is the difference between crude oil price and total value of petroleum products produced by the refinery.

However, Tulsian believes controversy of KG-D6 may not take a back seat. Media reports have suggested RIL and its partner BP Plc have not been successful in finding gas in nine out of the 22 wells approved by the government for their exploration in the KG basin. Also, the government has not agreed to RIL's demand to revise upwards the gas price.

BP had invested $ 7.5 billion (Rs 39,760 crore on Monday) to buy a 30 per cent stake in RIL's KG-D6 venture. Now, it is believed that both companies will together work for importing liquefied natural gas gas to India, which has been yet another grey area for other companies due to controversy on several issues, say experts.