Reliance Industries: Is the tide turning in its favour?

As Reliance Jio is set for launch and can boost street sentiments, investments in core business will accrue benefits in the medium term while in the excessive crude supplies are already adding to benefits

Reliance Industries (RIL) is drawing the attention of the street with the impending launch of its much awaited 4G service. With RIL having invested heavily in its telecom venture Reliance Jio, its success and return on investments will be crucial. The venture has drawn investor concern and analysts criticism of Reliance’s investments in the sector, based on long break-even and lower returns on heavy investments. Thus, while the launch and success will be watched for keenly, investor expectations are low, and success of the venture can boost Street sentiment.
 
Some amount of euphoria thereby seems to be setting in. Research firm Credit Suisse said it performed extensive tests on R-Jio's network in and around Mumbai. They say that they are encouraged by the initial test results and expect the focus to shift to Reliance Jio's pricing and marketing execution.

 
 With investor expectations low, and initial test results encouraging, it is seeing the upcoming commercial launch as a catalyst. Maintaining their bullish stance on the stock the analysts add that the stock is currently writing off $10 billion in telecom investments, which is harsh. “We see the commercial launch of Jio services as a key catalyst and maintain OUTperform ratings,” the company said.
 

The company’s investments in core business of refining and marketing is also set to grow. The company in June 2014 has made ambitious capex announcements of $30 billion or RS 1,80,000 crore spread over 3-5 years in its core refining and petrochemical segment and new refining and petrochemical projects are likely to add to earnings from FY18.  In the interim, however, the current over-supply of crude oil is benefitting complex refiners like Reliance. The oversupply is leading to oil producers’ offering extra discounts in order to gain market share. Dubai crude is currently trading at a 6% discount to Brent, which is higher than the 10-year average of 4%.

 
Analysts at HSBC say that complex refiners like RIL, which can use a variety of crude oil, stands to benefit from the current situation. Given its complexity, Reliance can buy crudes that others may not be able to, even at short notice. Thus, despite lower crude prices the company’s profitability will remain strong as utilisation levels remain high. The company has been reporting robust Gross Refining Margins in last few quarters (more than $10 a barrel). Analysts at HSBC looking at strong utilisation levels, which in turn will support regional refining margins, expect Reliance to report GRM of $10.5 a barrel in FY16 and FY17 and $10 a barrel in FY18.

The stock is currently trading at Rs 977 levels inching close to its 52 week highs of Rs 1067 seen during July’15.