Petrochemical expansion to drive growth of Reliance for next few years

Reliance Industries Ltd (RIL), which is facing several controversies related to KG-D6 gas production, surprised the Street on Saturday with better-than-expected first quarter earnings. Analysts believe good quarterly results and huge capex to augment its petrochemical facilities will lead to uptick in the stock over the next two fiscals.

The Mukesh Ambani-owned company's standalone net profit for the first quarter stood at Rs 5,649 crore, almost flat from the preceding quarter, but 5.5% higher from the corresponding period a year ago. Bloomberg estimate of 23 brokerages had pegged the net profit at Rs 5,435 crore at revenue of Rs 98,387 crore.

Lower interest and depreciation costs along with slightly better refining margins were the key reasons for higher profit when compared with a year ago quarter, RIL's chief financial officer Alok Agarwal said in an earnings press conference. Its standalone revenue for the quarter was at Rs 96,351 crore, up 1.2% on sequential basis and 9.9% higher from the year-ago period.

"Better result against our estimate of Rs 5,400 crore was mainly attributable to lower interest and depreciation costs, which fell by Rs 720 crore quarter on quarter. Depreciation declined due to change in depreciation policy, in line with recent change in accounting policy. Decline in interest costs was due to stable currency which led to reduction in fluctuation loss," Dhaval Joshi, an analyst with Emkay Global Financial, said.

The petrochemical major's interest costs dropped by a whooping 60% to Rs 324 crore, and depreciation cost declined to Rs 2,024 crore in the quarter from Rs 2,138 crore. "Next big trigger for the stock would announcement of revised gas price in October. We see uptick in the stock price on better results. We continue to maintain Buy on RIL with a target price of Rs 1,045. At current market price the stock trades at 10.5x FY16 earnings per share," Joshi said.

RIL's refining and petrochemical margins remained weak sequentially, as per the expectations. Gross refinery margins (GRMs) fell to $8.7 per barrel from $9.3/bbl in the March in line with 6% sequential fall in benchmark Singapore complex margins.

The company's refining segment EBIT declined 3.7% on quarter to Rs 3,814 crore. Its petrochemical EBIT contracted 13.3% sequentially to Rs 1,863 crore due to weaker polyester chain margins which offset strength in polymer margins. "Result reflects mid-cycle performance of refinery and petrochem business," Agarwal said.

Giving an outlook on the refining business, Agarwal said all-time-high US refinery capacity utilisation has resulted in surplus availability of products in the market, which is capping refinery margins. But if oil demand improves as estimated then little better margins could be expected by the year-end, he said.

Petrochem segment is currently going through a weak demand cycle. However, with the recovery in demand in the US and Europe, which likely to peak around 2016-17, new capacities will help the company take full advantage in two years. At the company's last AGM, chairman Ambani announced that the majority of RIL's Rs 180,000 crore investment lined up for next three years would go into petrochemical capacity expansion.

Higher crude price and increased output from Panna-Mukta fields pushed the EBIT of exploration and production operations, by 38.4% on-year and 29% sequentially to Rs 487 crore. Gas production at KG-D6 block remained flat at 13 mmscmd. "Higher volumes at Panna-Mukta would continue as the company has added infill wells to augment production," Joshi said.

Improvement in shale gas and retail operations mainly pushed the company's consolidated revenues. Its consolidated net profit in the first quarter rose 1.3% sequentially, and 13.7% from the year-ago quarter to Rs 5,957 crore and its consolidated revenue during the quarter were at Rs 107,905 crore, up 1.6% sequentially and 7.2% from a year ago.

The US shale gas operations Ebitda crossed $200 million for the first time, while retail revenue grew 14.5% from the year-ago quarter to Rs 3,999 crore in April-June. The company undertook store rationalisation during the quarter to improve margins.