Mixed analyst reactions to RIL results

Analysts’ reaction to the June quarter (Q1) earnings announcement of Reliance Industries (RIL), one of the country’s largest companies, is a mixed bag. The results were in line with Street expectations. Brokerages IIFL and BNP Paribas have raised their target price on the stock; ICICI Securities and Edelweiss have lowered it. Overall, the consensus target price on the stock has remained unchanged; however, on Monday, the total of ‘buy’ calls had reduced from 39 (before the Q1 announcement) to 33.

Some brokerage takes:

ElaraCapital

Benchmark gross refining margins (GRMs) are expected to remain weak, considering the huge stockpiles, weakness in demand due to the impact of Brexit (the British vote to leave the European Union) and expiry of tax breaks on smaller vehicles in China from January. We expect GRM to moderate to $8.8/barrel in FY18, even with commissioning of the petcoke gasifier. We value refining and marketing at Rs 407, using six times the FY18 EV/Ebitda (enterprise value to operating earnings). Petchem is valued at Rs 459, using six times the FY18 EV/Ebitda. We add Rs 55 for the E&P (exploration and production) assets and another Rs 44 for its investments and net debt, to arrive at a valuation of Rs 966, and reiterate our 'Sell' recommendation.

Deutsche Bank

RIL reported strong Q1 results, with the highest ever net profit of Rs 7,550 crore, led by robust refining margin of $11.5/barrel. Over the next six to nine months, RIL should commission projects with investments of $38 billion (75 per cent of its market cap). Contribution from capacity additions in its core business and robust downstream margins should drive Ebitda (excluding telecom) growth of 50 per cent in FY16-18. However, we cut the FY17 estimate of EPS (earnings per share) by two per cent and our target price by one per cent, to factor in the delay in the ramp-up of the petcoke gasification project.

Emkay

The management has maintained its positive outlook on its core business margin. Also, there is no change in its core capex plan in terms of time line and cost. The management has indicated higher capex for telecom beyond Rs 150,000 crore but still no clarity on its launch. The uplift on higher GRMs is backed by inventory gain but given the weak cracks, the Q2 margin might remain weak. Thus, unless GRM picks up from the current level of $5/bbl, the stock price would remain range-bound. With no change in estimates, we maintain a 'Buy' rating.

IIFL

RIL’s profit after tax beat our estimates due to higher than expected refining profits, led by higher GRMs. The company did not see any material impact on profitability due to adoption of Ind-AS (the new accounting standards). Commissioning timelines of the petcoke gassifier and off-gas cracker remain intact for the second half. RIL did not guide (announce) a firm timeline for commercial launch of Jio (the telecom venture), although it is in the final phases of network testing.

We upgrade our earnings for FY17 by 6.8 per cent, due to assumption of higher GRM. However, we cut our earnings estimates for FY18 by five per cent, to factor in a gradual ramp-up of petcoke gasifier. We maintain a 'Buy' rating, with a revised target price of Rs 1,275.