Rupee's 16% fall to benefit RIL despite falling GRMs

Analysts say the stock is attractive at current levels

Shares of Reliance Industries have been beaten down, like many other large cap stocks, over the last few months on concerns that its petchem margins are under pressure and gross refining margins have fallen.

Given that it imports most of its raw materials, the falling rupee too would impact costs. The market has over-reacted to the negatives and beaten down the stock Rs 806 levels last week, down by 11%.

At these levels, analysts believe that the stock is attractive as the rupee’s fall will also impact the company positively. The RIL stock now trades at 10.3x FY2014 earnings and 9.4x FY2015 earnings (adjusted for treasury shares).

For one, the rupee is expected to drive the company’s profitability in this quarter. The rupee has fallen 16% over the last three months compared to the dollar and since Reliance is a large exporter, it will benefit from the rupee’s weakness in the second quarter even among other operational concerns.

For starters, the core business (now its is petchem and refining), will start generating higher profits over the years as capacities expand.  

Even though globally, the refining cycle is showing signs of weakness, analysts expect the fall in GRMs to be compensated by a weak rupee as it will result in higher conversion margins. Even though the company’s inputs costs will rise, it will get higher margins for converting the raw materials into finished products in dollar terms. The margins for the exploration and production business will also improve materially due to the rupee’s fall, even though gas production continues to decline. Kotak Institutional Equities has revised their FY2014-16 earnings per share estimates for RIL to Rs 70.8 (+4%), Rs 77.9 (+8.5%) and Rs 79.1 (+10.5%) to reflect revised weaker exchange-rate forecasts, lower refining margins and minor other changes.