Brokerages recommend 'BUY' on RIL; refining margins disappoints
Global brokerage firms remain positive and recommend a 'BUY' on Reliance after the oil & gas major posted a 16% rise in quarterly profit.
By Ritu Jindal & Kshitij Anand, ET Online | Updated:
NEW DELHI: Global brokerage firms remain positive and recommend a ‘BUY’ on Reliance Industries Ltd after the oil & gas major posted a 16% rise in quarterly profit as its plants, including the world's largest refining complex in Jamnagar, ran flat out, and refining margins more than made up for lower gas output and weaker returns from petrochemicals.
While RIL’s 2Q PAT of Rs 5700 crore (+16% yoy, +1% qoq) was in line, EBITDA at Rs 9840 crore was ahead of expectations driven by an extremely strong petrochemical performance as domestic demand recovered sharply, offsetting a subdued refining quarter.
The quarter also saw the part-impact (for 1 month) of the BP deal, which led to a corresponding (albeit in line) fall in E&P EBITDA, which was offset by lower DD&A (Depletion, Depreciation and Amortization).
“The increase in profits was largely driven by improved performance in the refining and petrochemicals business. All our manufacturing facilities operated at record levels with refineries achieving operating rates of 110%,” RIL chairman Mukesh Ambani said in a statement.
RIL’s petrochemicals segment reported higher profit and revenue, but margins declined. Polymer demand was flat due to the global economic uncertainty. Domestic polyester demand declined 2% in the past six months due to labour and power shortage in downstream industries.
In a recent report, Reliance Industries will suspend drilling across its entire oil & gas portfolio until a process of re-evaluation, currently under way, and a fresh plan will be submitted to the government.
Please click here to read the complete story on RIL results
Refining disappoints:
Gross refining margin (GRM) of US$10.1/bbl was below most brokerages expectations. This was largely due to: $2 q-o-q decline in mid-distillate spreads, which form a larger chunk of RIL’s product slate, (ii) lower leverage to gasoline/FO spreads (improved $2.5-3 q-o-q), (iii) q-o-q lower L-H differentials (by ~$1.3) (iv) increase in LNG prices as well as offtake.
Refining differential over benchmark Singapore index narrowed to US$1/bbl led by high Brent-Dubai differential and weak gasoil and LPG spreads even as gasoline spreads remained strong.
While RIL’s 2Q PAT of Rs 5700 crore (+16% yoy, +1% qoq) was in line, EBITDA at Rs 9840 crore was ahead of expectations driven by an extremely strong petrochemical performance as domestic demand recovered sharply, offsetting a subdued refining quarter.
The quarter also saw the part-impact (for 1 month) of the BP deal, which led to a corresponding (albeit in line) fall in E&P EBITDA, which was offset by lower DD&A (Depletion, Depreciation and Amortization).
“The increase in profits was largely driven by improved performance in the refining and petrochemicals business. All our manufacturing facilities operated at record levels with refineries achieving operating rates of 110%,” RIL chairman Mukesh Ambani said in a statement.
RIL’s petrochemicals segment reported higher profit and revenue, but margins declined. Polymer demand was flat due to the global economic uncertainty. Domestic polyester demand declined 2% in the past six months due to labour and power shortage in downstream industries.
In a recent report, Reliance Industries will suspend drilling across its entire oil & gas portfolio until a process of re-evaluation, currently under way, and a fresh plan will be submitted to the government.
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Please click here to read the complete story on RIL results
Refining disappoints:
Gross refining margin (GRM) of US$10.1/bbl was below most brokerages expectations. This was largely due to: $2 q-o-q decline in mid-distillate spreads, which form a larger chunk of RIL’s product slate, (ii) lower leverage to gasoline/FO spreads (improved $2.5-3 q-o-q), (iii) q-o-q lower L-H differentials (by ~$1.3) (iv) increase in LNG prices as well as offtake.
Refining differential over benchmark Singapore index narrowed to US$1/bbl led by high Brent-Dubai differential and weak gasoil and LPG spreads even as gasoline spreads remained strong.
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While RIL expects refining margin environment to be strong as they expect low delivery on expected cap adds and continued demand from EM may brokerages have reduced GRM expectations on poor outlook for Light-Heavy crude differentials as Libya ramps-up crude production faster than earlier expected.
Key Risks
RIL’s core refining and petrochemicals business remains stable which partly offsets risks on slower KG ramp-up.
The key downside risks RIL are:
Its margins are exposed to the global refining and petrochemical cycles, which could be impacted by a global macro economic slowdown.
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Further delays in ramp-up of production of KG-D6 gas and negative news flow on KG-D6 capital expenditure or negative news flow for the other blocks (D9, D3, MN-D4) may also hamper productivity.Charges against RIL pertaining to a 2007 case regarding insider trading in shares of Reliance Petroleum Limited (RPL) (an erstwhile subsidiary), which could impact stock sentiment.
Brokerage View (Valuations):
Standard Chartered recommends ‘BUY’ with a target price of Rs 969
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RIL’s results were in-line with our estimates. Firm petrochemical and refining performance compensate for weak exploration & production (E&P). Petrochemical EBIT was supported by demand up-tick after inventory de-stocking in 1Q. Refining differential over benchmark Singapore index narrowed to US$1/bbl led by high Brent-Dubai differential and weak gas oil and LPG spreads even as gasoline spreads remained strong.
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Satellite and R series development in D6 will commence only after commerciality approval from the government.Citi recommends ‘BUY’ with a target price of Rs 1001.
Reliance Industry’s core refining and petrochemicals businesses should remain stable, while continued cotton tightness should sustain margins across the polyester chain, benefiting Reliance Industries.
The brokerage expects refining margins to remain stable given major new capacity additions in China/Middle East are expected only 2014-15 onwards.
Further clarity on ramp-up of KG gas is still awaited while the deal with BP is positive as it should ratify RIL's capex in KG-D6 and should eventually provide clarity on production ramp-up.
A 20% premium to NAV of known reserves looks justified for the E&P business given new discoveries, access to BP's technology, and stakes in several prospective deepwater blocks.
Edelweiss maintains ‘BUY’ with a target price of Rs 1,148.
It says “We maintain the FY12E EPS while marginally reducing it for FY13 by 1.6% to account for lower KG-D6 volumes and marginally lower refining margins.”
Now that the BP deal has been cleared, we believe that approval of development plant for satellite fields and pricing for CBM blocks are triggers that will play out in the next 2-3 quarters.
RIL’s new SOTP at Rs 1,148 implies a 30%+ upside from current levels. We maintain ‘BUY/Sector Outperformer’ on the stock. At CMP, RIL is trading at 7.1x EV/EBITDA and 12.1x P/E on FY12 estimates.
JPMorgan retain ‘Overweight’ with a target price of Rs 1140
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We estimate 15% earnings CAGR for RIL over FY11-14E with robust refining and petchem performance and introducing shale gas revenues. We lower our assumptions on KG gas production to 45-65mmscmd over FY12-14.We estimate resilient refining and petchem margins, along with incremental gas production growth, would be the primary drivers for earnings growth over FY11-14E. Also, RIL’s earnings are positively linked to rupee depreciation.
Key downside risk would be a prolonged global slowdown leading to lower refining and petchem earning, and harsh regulatory action/regulatory delays.
CLSA has downgraded Reliance Industries to ‘Outperform’ from ‘Buy’
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CLSA downgraded Reliance Industries to ‘Outperform’ from ‘Buy’ and cut target price to Rs 950 from Rs Rs 960, citing premium to global peers and weak gross refining margins (GRM).“We have cut FY12-13 EPS by 2-4 percent primarily to model a $0.2-0.3/bbl cut to GRMs,” said CLSA. “We now expect no rebound in KG-D6 gas volumes till FY14,” added the research house. Reliance Industries came out with its Q2 results on Saturday where profits rose 16 percent as expected.
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