Reliance Industries’ (RIL’s) move to acquire Luxembourg-based petrochemicals firm LloyndellBasell for $14.5 billion did not materialise. But, its recent announcement of forming a joint venture with Atlas Energy to develop shale gas acreage (RIL’s net share at 5.3 trillion cubic feet) involving an investment of almost $5 billion over ten years indicates the company continues to scout for growth opportunities globally.
With an estimated cash generation of $14 billion over two years and cash equivalents of over Rs 20,000 crore, analysts believe RIL will continue to look for sizeable investment opportunities going ahead. What’s equally exciting is that its fortunes are expected to improve on the back of the rise in margins in the refining business, and higher gas and refining volumes.
Improving fortunes
From their multi-year lows (in 2009), gross refining margins (GRMs) improved substantially in January and February this year but gave up some of the gains later. Going ahead, on the back of a recovery in demand, especially in Asia and the US, analysts expect margins to gradually inch up.
In a report last month-end, Macquarie’s analysts estimated Asian complex GRMs per barrel to average at $6.22 in 2010-11 and $7.75 in 2011-12. RIL, which had seen its GRMs tank by more than half to $6.2 a barrel in the nine months to December 2009 (these were down 40 per cent year-on-year to $5.9 a barrel in the December quarter), is expected to gain from the improvement in the global refining outlook.
The gains could be larger for RIL due to its highly complex refinery, which provides flexibility in terms of product mix (output) and enjoys higher spreads led by its ability to process cheaper variety of heavy crude oil. In a recent report, Motilal Oswal Securities’ analysts said they have built GRMs of $7.6 a barrel for RIL in 2010-11. The petrochemicals business, which reported a surge in margins in the first nine months of 2009-10, is also expected to do well in the March 2010 quarter and beyond. The oil and gas exploration and production (E&P) business, which saw the commissioning of gas output from the K-G Basin in April 2009, is also expected to contribute substantially.
Gas volumes are seen rising in 2010-11 to over 60-70 million standard cubic metres a day (mscmd) from an average of 30-35 mscmd in the first nine months of 2009-10. The company has already achieved a stable gas output of over 60 mscmd in the last few months. Likewise, the full ramp-up of output at its new Jamnagar refinery should also add to refining volumes in 2010-11.
| TURNING ON THE GAS | |||
| in Rs crore | FY09 | FY10E | FY11E |
| EBITDA | 25,743 | 30,602 | 40,915 |
| PAT * | 15,309 | 16,456 | 22,596 |
| EPS (Rs) | 48.6 | 55.2 | 75.5 |
| PE (x) | 22.29 | 19.63 | 14.35 |
| E: Average analysts estimates * Before exceptional items | |||
Conclusion
The combined gains of improvement in margins and output in the refining business, steady petrochemicals outlook and higher gas volumes are seen driving RIL’s performance in the March 2010 quarter and 2010-11. On April 12, Standard & Poor’s (S&P’s) revised its outlook on RIL to stable from negative.
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“We revised the outlook to reflect our expectation of an improvement in RIL’s financial metrics because we believe the consistent improvement in its operating performance over the past year is sustainable,” its analyst noted. While S&P’s expects RIL’s earnings before interest, depreciation, taxation and amortisation (EBIDTA) to have increased 20 per cent in 2009-10, it expects the company to further improve its operating performance by maintaining the existing level of gas production and a potential improvement in refining margins.
For the March 2010 quarter, analysts expect RIL’s net profit to rise by about 40 per cent to over Rs 5,400 crore. As per mean analysts estimates (on Bloomberg), RIL’s earnings per share (EPS) is seen rising 41.8 per cent year-on-year to Rs 72.9 in 2010-11. They have put a 12-month price target price of Rs 1,127.30 for RIL, which closed at Rs 1,083.30 on Friday. Among crucial events to watch for going forward are the outcome of the pending gas dispute with RNRL and NTPC, new discoveries in the E&P business and how RIL deploys its cash reserves.