Rupee fall brings cheer to Reliance Industries

In the last 3 months, rupee has depreciated 16% against dollar

The rupee falling against the dollar is bringing cheer to Mukesh Ambani-controlled Reliance Industries Ltd (RIL), which exports two-third of its refined products.

A weaker rupee means bigger benefits for the company,  as both its gross refining margins and petrochemical spreads are denominated in the dollar. In the past three months, the rupee has depreciated 16 per cent against the dollar.

“Domestic sales of refined products/petchemical products/exploration and production are all benchmarked to the dollar. RIL is among the beneficiaries of the rupee’s slide,” said Samuel Lee and Neil Gupte of JPMorgan in a note on RIL.  

Lee and Gupte added RIL remained one of the best performing regional refiners year-to-date and estimated an average of 60/65/70 for the rest of FY14 will add six per cent/14 per cent/23 per cent to RIL’s FY14 earnings. “While India’s macrooutlook might remain a negative overhang on RIL’s share price in the near term, we believe the underlying business remains fundamentally sound, given its relative large exposure to Asia versus India (65 per cent of revenue exports) and dollar-based margins. This does, however, also increase debt, as the bulk of RIL’s debt is forex (foreign exchange)-denominated,” said Lee and Gupte.

Furthermore, RIL will benefit from inventory gains on higher crude oil prices, with Brent now hovering around $109 a barrel against $100 at the end of the second quarter.

<B>Downside</B>
A downside to the weaker rupee, however, is an expensive dollar debt and potential reduction in domestic product demand due to higher crude cost. On the back of weaker refining margins and a softer Indian equity market, RIL’s scrip is down 13 per cent in the past month.

While the regional gross refining margin is down to $4.2 a barrel on slower demand, despite the weakness, the second quarter average gross refining margin is the same as the first quarter at $6.6 a barrel,  with the calendar year 2013 average six per cent higher year-on-year at $7.3 a barrel.

Sanjeev Prasad and Tarun Lakhotia of Kotak Institutional Equities wrote in a report: “RIL benefits from a weakening of the rupee across its segments. A weaker rupee will result in higher prices, in rupee terms, for both products and raw materials of RIL’s refining and petchem segments and hence, will translate into higher conversion margins.”

The weak rupee and strong other income, however, may come to RIL’s rescue during the second quarter and help the company boost net profits while its Ebitda (earnings before interest, taxes, depreciation, and amortisation) is expected to fall to a 19-quarter low, said Barclays Capital in its report.