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After three years of downgrades, Reliance Industries Ltd (RIL) is back in the reckoning, as it is showing improvement across its core businesses. From the second quarter of FY13 the company has been conveying that it is seeing a sequential improvement across key segments. For starters, gross refining margins (GRMs) have remained strong for the last couple of quarters on maintenance shutdowns globally and this is likely to continue in 2013, too.
Refining is expected to drive the company's profitability even in the fourth quarter. Singapore complex GRMs, which are a benchmark for Indian refining companies, are up 35 per cent sequentially for the three months ended March 2013. Singapore GRMs, which averaged $8.8 a barrel so far in the first quarter of 2013, are expected to remain in this range through the first half of the year on tight supply, says Morgan Stanley. The brokerage has gone overweight from underweight earlier this month on the belief that the core business is well placed for long-term growth.
Apart from higher GRMs, the price differential between Arab light and heavy crude expanded to $4.8 a barrel in March 2013 from $3.8/barrel in December 2012. Analysts also say RIL's product cracks have improved in the current quarter. The company ended the December quarter with GRMs of $9.6 a barrel and analysts expect it to do better in the fourth quarter of FY13. Sharekhan says: "Looking at the recent expansion in the product cracks, we expect the company's GRM to improve in the coming quarter as well (Q4FY13). Every $1-per-barrel improvement in the GRM provides our earnings estimate for both FY14 and FY15 an upside of three to four per cent."
Other than refining margins, analysts also believe that margins in the petchem business will show a sequential improvement. The petchem business accounts for 20 per cent of revenues and 35 per cent of profits. Analysts believe the petchem cycle is turning positive, and with demand picking up and curtailed supplies, petchem product prices have moved up. For instance, feedstock prices have moved up three to four per cent in the last couple of months. The company reported earnings before interest and tax margins of 8.8 per cent in the petchem business in the third quarter, and analysts expect an uptick in these, too.
So far the market has had a negative stance on the stock due to consistently falling gas output from the KG-D6 basin. In early March, the output fell to 17.3 mn standard cubic meters per day (mmscmd) as more than a third of the wells in the basin are shut down due to water and sand ingress. However, the company has received approvals to develop satellite fields and it has submitted a plan to the government to develop KG-D6 R series. Analysts say gas output would improve in FY14 and if the government increases gas prices, it will improve profitability substantially.
