Reliance Industries: Adding more legs to growth

More than $6-bn investment, growth in near term will come from investments made in past 4 yrs

With its announcement to ramp up gas production, Reliance Industries (RIL) has finally addressed the issue of declining gas volumes from the Krishna Godavari (KG-D6) fields. Thus, the investment of $6 billion or Rs 40,000 crore in association with British Petroleum (BP) for developing about 3 trillion cubic feet of discovered gas resources in KG-D6 block is expected to benefit the company, albeit in the longer term.

Analysts feel the plan to develop existing discoveries in D6 is a clear positive and a fresh round of capex could rub off on the stock. Earnings upgrades, however, will start coming only with tangible progress in exploration and production. Analysts at Kotak Institutional Equities say that developing discovered gas resources will be positive though they await further progress before incorporating these developments into RIL’s financials. They have an “add” rating on the stock.
 

The start of fresh capex is necessary for business segments that RIL operates to drive longer-term growth. Its investments in its core refining and petrochemicals business over the past three-four years are bearing fruit and have led to earnings upgrades. Similarly, the investments in telecom venture Jio, that had been looked at with concern as it was weighing on return ratios earlier, is now gradually getting factored into earnings. The monetisation of earlier investments is driving the earnings growth and thereby keeping the stock prices on the upswing.
 

Investments in gas production, too, will benefit the company over time. The initiation of the development of dry gas discoveries in R-Series (D-34) fields, are expected to come on-stream by the 2020 calendar year and produce up to 12 mmscmd (million metric standard cubic meters per day) of natural gas. However, for two other projects, the regulatory approvals by the government and gas regulators will be necessary. Reliance-BP will submit development plans for these two projects in KG-D6 block by end-2017, which will be developed subsequently by 2022 to increase overall new gas production to 30-35 mmscmd. Also, gas prices play an important role in the viability of gas exploration and production given the costs incurred. Abhijeet Bora at Sharekhan says although the plans to sharply increase gas production from the current 8 mmscmd seems positive from a long-term perspective but RIL-BP’s investment plans would be contingent to revision in domestic gas prices as development of deep water fields seems difficult at current gas price of $5.56/mmbtu for deep water blocks. He maintains a “buy” rating on Reliance.
 

The stock prospects in the near term will thereby be driven by new projects in core refining and petrochemicals coming on stream as the company continues to monetise its telecom business. Analysts at CLSA say the $40-billion worth of (earlier) projects to start in the next six-nine months will remain key to near-term trigger for the stock.