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Reliance Industries (RIL) has been an outperformer. Since March-end, its stock has risen from Rs 810 to Rs 1,007. Reliance Jio’s forthcoming launch might have helped sentiments but not so much to boost the stock by 24 per cent in less than four months.
While the strong gross refining margins (GRM) had led to the initial spike despite weak crude oil prices, a boost to earnings (led by investments in the core business) over the coming 18 months has turned analysts bullish. In the near-term, the market is expecting RIL to do an encore in the June’15 quarter by posting strong performance as seen in the March quarter.
The company had reported GRM of $10.1 a barrel in the March’15 quarter, boosting the Street sentiments. However, with Singapore complex GRM declining by $0.5 a barrel in June over the March quarter to $8.1 a barrel, it will be interesting to see how Reliance’s GRM pans out.
While the strong gross refining margins (GRM) had led to the initial spike despite weak crude oil prices, a boost to earnings (led by investments in the core business) over the coming 18 months has turned analysts bullish. In the near-term, the market is expecting RIL to do an encore in the June’15 quarter by posting strong performance as seen in the March quarter.
The company had reported GRM of $10.1 a barrel in the March’15 quarter, boosting the Street sentiments. However, with Singapore complex GRM declining by $0.5 a barrel in June over the March quarter to $8.1 a barrel, it will be interesting to see how Reliance’s GRM pans out.
While analysts expect Reliance’s GRM to come at $9.5 in the June quarter, petchem margins could compensate and provide the kicker. The blended per metric tonne petchem margin is estimated at $343, compared with $285 and $287 in March’15 and June’14 quarter, respectively. This could lead to a strong performance by Reliance. Though sequentially the GRM is pegged lower, they should still be higher than $8.7 a barrel in the June’14 quarter. Thus, improved GRM on year-on-year basis and pick-up in petrochemical margins is likely to drive RIL’s profitability. Analysts at Jefferies expect Reliance’s Ebitda (earnings before interest, tax, depreciation and amortisation) to improve 20 per cent over a year and four per cent sequentially. They expect net profit to rise 10 per cent over a year.
The Street has all eyes on RIL’s telecom launch. Analysts at Motilal Oswal Securities believe Reliance’s new refining and petchem projects might add to earnings from end-FY18 but telecom business will be a drag on profitability leading to sub-13 per cent return on equity.
Reliance’s $30-billion investment cycle is coming to an end in FY16. While from the investments in core energy business analysts at CLSA expect more than 40 per cent upside by March 2017, RIL’s $13 billion worth investments in consumer business represent 25 per cent of its FY15 standalone balance sheet.
The analysts, however, add a successful launch of its 4G mobile services, a pick-up in organised retail from a new online offering, and a ramp-up of its auto-fuel business could boost Reliance’s equity value by $17 billion (less than 30% of its current market cap). Thus taking into consideration upside from core energy business and potential option value of consumer business they have rolled over their September 2016 target price to Rs 1,300.
