Re-rating Reliance PDF Print E-mail
Tuesday, 15 October 2013 00:02
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Govt holds back KG piece, US shale holds the key

The reasonably good quality of Reliance Industries Limited (RIL) results for the three months to September 2013 should cheer investors given the stock has underperformed the Sensex over the last one year and even in the last three months. Operating profits are up 11% sequentially to R7,849 crore thanks particularly to the better numbers from the petrochemicals piece and some help from the refining businesses rather than higher treasury income as was the case in Q1FY14. The rupee’s steep depreciation, though, has come in handy, else the sharp drop in gross refining margins (GRM) to $7.7 per barrel from $8.4 per barrel in the June 2013 quarter would have hurt the bottom line badly. While the stock may rally somewhat, it’s unlikely the price is running away. GRMs are expected to stay in the region of $8 per barrel for the next couple of years now that a fair amount of capacity is coming in and the recovery in the global economy appears delayed—benchmark margins in the current year have dipped below those seen in FY13. Moreover, while RIL is aggressively growing the petrochemicals business—the spends earmarked are roughly $8 billion in the next three years—the results will be gradual as operating profits are tipped to treble by FY17, when the new capacities are all fully up and running. In H1FY14, petrochemical volumes have stayed flat over H1FY13 indicating moderate demand.

The big problem remains the E&P piece where gas production at the KGD6 is estimated to fall to 10 mmscmd by FY16 from current levels of 14mmscmd. While RIL has found new gas, and the Rangarajan panel has freed up gas prices a bit, to around $7 per mmBtu, RIL’s fresh investments are not viable at less than $10. More important, a spat with the Directorate General of Hydrocarbons has resulted in the latter asking it to give up acreages where it has found gas; and the government is trying to cap gas prices till RIL makes good its alleged shortfall in production in the KGD6 area. While RIL is unlikely to be able to use its free cash flows of R25,000 crore annually and it will be a while before the telecom and retail businesses start chipping in, the big surprise will be US shale where H1FY14 revenues rose 61% to $408 million and ebitda to a whopping $292 million or 72%—US shale makes more money than its Indian gas operations. A couple of more US buyouts and RIL’s stock could be on a roll.


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