RIL: Exploring gains

Ramp-up of gas production from the KG-D6 basin is the key to any upward movement in the stock

Reliance Industries’ (RIL’s) December 2010 quarter results, announced after the close of the market session on January 21, were driven by strong refining margins of $9 a barrel compared to $5.9 during the corresponding period a year ago. The rise in refining margins was complemented by increasing profitability in the petrochemical (petchem) segment. The company’s net profit surged 28.14 per cent year-on-year to Rs 5,136 crore, while net sales rose 5.16 per cent to Rs 59,789 crore. Earnings before interest, tax, depreciation and amortisation (Ebitda) rose 22 per cent to Rs 9,545 crore, with a 217-basis-point margin expansion.

Increasing volumes and higher polymer and polyester prices propelled the performance of the petrochemical segment, which reported a 8.17 per cent jump in revenues to Rs 15,962 crore. Polymer margins were boosted by high Asian demand, while polyester prices and margins increased with rising cotton prices. A Motilal Oswal reports suggests petchem production increased four per cent year-on-year to 5.6 million tonnes per annum, while prices of polyethylene and poly propylene increased 4.8 per cent and 5.1 per cent, respectively. Concerns regarding increasing capacities in West Asia were addressed by the management. It said increasing supplies were being taken care of by rising demand in India and China.

With a positive outlook for the petchem segment, analysts are keeping a tab on the dip in gas production during the December 2010 quarter and further ramp-up of production to 80 mscmd (million standard cubic metres per day). According to a recent Angel Broking report, though production from the Krishna-Godavari D6 (KG-D6) block dipped nearly seven per cent sequentially to 54.5 mscmd in the December 2010 quarter due to reservoir pressure constraints, RIL will be able to ramp it up in the coming quarters. Analysts at Motilal Oswal have already revised their KG-D6 gas production assumption from 60-80 msmcd to 55-60 msmcd for FY12-FY13. At Rs 971.05, the stock trades at 14 times 2010-11 and 13.5 times 2011-12 earnings estimates, according to Motilal Oswal.