Reliance Industries Ltd. - Q4FY12 Result Update - Centrum

Refining performs while petchem and E&P remain under pressure

Reliance Industries Limited (RIL) Q4FY12 numbers were largely in line barring higher than expected GRMs and higher other income. Improvement in Gasoline-Crude and Naphtha-Crude cracks led to sequential jump in GRMs which stood at US$7.6/bbl. Petchem margins remained under pressure due to higher naphtha prices. KG D6 gas production further declined to 35mmscmd. Higher other income at Rs23.0bn supported the bottom-line which stood at Rs42.4bn against Rs53.8bn in Q4FY11 and Rs44.4bn in Q3FY12.

Gasoline-Crude and Naphtha-Crude cracks lead to improved GRMs: After reaching the trough of US$6.8/bbl during Q3, RIL's GRMs clawed back to US$7.6/bbl primarily on the back of expansion in Gasoline-Crude and Naphtha-Crude cracks. Some support was provided by the lightheavy and sweet-sour differentials as well. Complexity advantage is again back with RIL now and GRMs, although not expected to improve considerably, will not deteriorate significantly.

China slowdown, ME supplies keep petchem margins under pressure: During the past couple of quarters, China's petchem demand has been under pressure and ME supplies have jumped hammering petchem margins. Additionally, higher naphtha prices also impacted margins. Domestic demand has been sluggish but is expected to pick up with average demand growth of about 11-12%.

KG D6 production is still on a decline: During Q4, KG D6 gas production further declined to an average of 35mmscmd from 41mmscmd in Q3. Currently the production is averaging at about 33mmscmd.

Awaiting gas price revision: RIL has chalked out an integrated development plan for KG basin but is skeptical on further investments till clarity on natural gas price emerges (RIL is scouting for higher gas prices than current US$4.2/mmbtu). We believe this will be the key trigger for RIL going ahead apart from any inorganic initiative as the company now has over Rs700bn cash on its books. Share buyback is likely to support the stock price in the near term (Rs2.8bn by March 2012). Improvement in GRMs will support earnings amidst pressure on petchem margins and declining KG D6 gas production. We maintain 'Buy' on the stock purely from a valuations perspective.

Source : Equity Bulls

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