RIL tumbles nearly 13% to Rs 1,113.15 on weak petroleum demand outlook

Weaker crude indicates oversupply and could be supportive of margins; howeverm if the weakness is demand-related, it could have the opposite effect on margins

Mukesh Ambani-promoted Reliance Industries (RIL) on Monday fell close to 13 per cent at the stock exchanges, on anticipated weak petroleum demand.

In Monday’s trade, RIL closed at Rs 1,113.15 per share, 12.35 per cent down from its previous close on the Bombay Stock Exchange. At play, was the fall in crude oil prices and an expectation of lower demand for the petrochemicals business.

“What is playing out is a weaker demand for petroleum, in general, impacting RIL's stock prices. The petchem segment has around 1-1.5x times linkage to economic growth. A weaker demand environment, stemming from weaker economic growth, amid capacity addition, especially in the US, is adding to headwinds. Weaker crude is in a way positive to the extent that weakness pertains to oversupply in the crude oil market, and could be supportive for margins,  however, any demand-related weakness is likely to weigh on margins,” said Nitin Tiwari, vice-president at Antique Stock Broking.

RIL’s petrochemicals business contributes roughly 31 per cent to RIL’s consolidated earnings before interest, taxation, depreciation and amortisation or Ebitda.

"The current problem is definitely the sharp fall in crude oil prices and the resultant impact on the supply side of petroleum products. There may be uncertainty in the off-take of petroleum products for some time, which may impact RIL for a short period,” said Deven Choksey, managing director of KRChoksey Investment Managers.

Overall, refiners, like Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation, stand to gain from the weak crude oil prices. RIL’s refining business stands to benefit similarly.

“We expect downstream oil companies to benefit from lower crude oil prices from improvement in marketing margins, reduction in fuel and loss, increase in crude discounts from the West Asian region and lower working capital. Resulting gains will allow these companies to offset one-time losses on inventory as well as sustained weakness in underlying refining margins,” analysts Tarun Lakhotia and Hemang Khanna, wrote in a Kotak Securities report.  The refining benefit, certain others add, will also hinge on sustaining the low crude oil prices."

An analyst at a domestic brokerage firm, who did not wish to be identified, added, “Monday’s fall in prices for RIL was due to the global sell-off. However, if crude remains at current level, the broad expectation is demand for petrochemicals will be low,” he said.

RIL’s exports are also expected to take a hit. In the December 2019 quarter, exports from the company’s India operations took a hit of 13.7 per cent, lower at Rs 53,804 crore.

Monday’s hit comes after RIL’s stocks have been under pressure for the last few weeks. “RIL is down to levels reached last year when it stated its plan to lower debt; concern about energy cash-flow is rising. The stock is pricing in cash cost industry margins on energy, and limited upside from de-gearing despite reduced capital intensity, higher Average revenue per user (ARPU)s, and improved return on capital employed (ROCE),” said analysts with Morgan Stanley in a report released on March 8, before the Monday trade.