RIL: Is the tide turning in its favour?

While Reliance Jio's launch will boost sentiment, investment in core business will accrue benefits in the medium term

Reliance Industries (RIL) is drawing the Street’s attention as the launch of the much-awaited fourth generation (4G) telecom service approaches. With RIL having invested heavily into its telecom venture Reliance Jio, the success of the same and return on investment will be crucial. The move had drawn concerns of investors, with some analysts criticising Reliance’s investments into telecom, looking at the long break-even period and its impact on return ratios. Thus, while the launch and success will be watched keenly, investor expectations are low and success can boost Street sentiment.

Some amount of euphoria seems to be setting in. Research firm Credit Suisse said it performed extensive tests on RJio's network in and around Mumbai. It expects the focus to shift to Reliance Jio’s pricing and marketing execution. With the initial test results encouraging, the coming commercial launch could be a catalyst. Maintaining their bullish stance, Credit Suisse analysts add the stock is currently writing off $10 billion in telecom investments, which is harsh. “We see the commercial launch of Jio services as a key catalyst and maintain an ‘outperform’ rating,” said their analysts.

  RIL’s investments in the core business of refining and marketing are also set to bear fruit. In June 2014, the company made ambitious capex announcements of $30 billion (Rs 1.8 lakh crore) spread over five years into its core refining and petchem segment, which would add to earnings from FY18. Some of the projects will start reflecting in RIL’s numbers in FY16 and FY17 as well.

The current oversupply of crude oil is benefiting complex refiners such as Reliance. The oversupply is leading to oil producers’ offering extra discounts to gain market share. Dubai crude, for instance, is currently trading at a six per cent discount to Brent, higher than the 10-year average of four per cent.

Analysts at HSBC say complex refiners, which can use a variety of crude oil, stand to benefit from the situation. Given its refinery's complexity, Reliance can buy crudes others might not be able to process, even at short notice. Thus, despite lower crude prices, profitability will remain strong because utilisation levels also remain high. The company has been reporting robust gross refining margins (GRM) in the past few quarters, of around $10 a barrel. Looking at strong utilisation levels, which in turn will support regional refining margins, HSBC analysts expect RIL to report GRM of $10.5 a barrel in FY16 and FY17, and $10 in FY18. The stock is currently trading at Rs 992, close to its 52-week highs of Rs 1,067 seen during July.