Reliance Industries - Results disappoint, core business under pressure - Emkay

RIL reported disappointing set of numbers on the back of margin pressure on refining and petchem business.

- Higher Other Income at Rs17bn v/s Rs7.4bn in Dec11Qtr, stalling the decline in net profit to 13.6%yoy and 22%qoq to Rs44.4bn.

- Company has announced Buy Back plan of upto 120mn fully paid shares at a price not exceeding Rs870 per share, upto aggregate amount of Rs104.4bn from open market.

- Going ahead we remain cautious on refining and petchem margins on the back of new capacities and/or weakening demand. We downgrade our reco to Accumulate and cut our target price to Rs913.

Refining margins surprise on downside

- GRMs for RIL declined during the quarter as spreads on gasoline and naphtha weakened during the quarter.

- Decline in spread between light-heavy crude oil on account of strong fuel oil market also affected refining margins of complex refinery players like RIL.

- Pet coke and sulphur prices continued to trail increase in crude oil prices, which pulled down complex refining margins. RIL GRMs at a discount to benchmark Singapore margins during the quarter.

- RIL reported GRMs at a discount to the benchmark Singapore refining margins as spreads on fuel oil were better during the quarter. While RIL product slate does not contain any fuel oil, benchmark Singapore margin considers fuel oil production at 23%.

- RIL's GRMs were lower during the quarter on account of difference in marker price and physical price for crude oil. Physical price for oil was witnessed higher by US$2-2.5/bbl during the quarter as compared to marker price, which was not the case earlier.

- RIL's GRM stood at US$6.8/bbl v/s US$9/bbl in Dec10Qtr and US$10.1/bbl in Sept11Qtr. Benchmark Singapore refining margin for the quarter stood at US$7.9/bbl v/s US$5.5/bbl in Dec10Qtr and US$9.1/bbl in Sept11Qtr.

EBIDTA decline as all three segments reported lower profits
- EBIDTA for the quarter declined 24%yoy and 26%qoq to Rs72.8bn. Decline was on he back of decline in EBIT for refining, petchem and Oil & Gas.

- While refining EBIT declined 31%yoy and 45%qoq to Rs16.9bn, Petchem EBIT declined by 11% to Rs21.6bn.

- Oil & Gas EBIT declined on account of 30% stake sale to BP. Gas production from KG basin during the quarter was low at 40.9mmscmd v/s 45mmscmd in Sept11Qtr.

Valuation

While the concerns on declining gas production in KG basin have remained, RIL stock has under performed in the last two months on the back of sharp correction in GRMs and weak petchem chain margins on the back of a weakening demand. The stock currently trades at FY12E and FY13E PE multiple of 12.3x and 11x. The stock gained recently on the back of buyback announcement at a price not exceeding Rs870 per share, which will act a support to the stock price in near term.

Going ahead we remain cautious on refining and petchem margins on the back of new capacities and/or weakening demand. We now factor in lower GRMs and built in flat margins from petchem for FY13E. Downgrade our reco to Accumulate and cut our target price to Rs913.

Source : Equity Bulls

Keywords