RIL - Approval of integrated development plan for gas production remains the key - Centrum

RIL surprised us and the street with higher than expected Q1 earnings backed by better than expected GRMs at US$7.6/bbl, higher other income and lower tax rate. Performance of polymers remained stable while that of polyester was lacklustre due to depressed cotton prices. E&P continued to disappoint with lower KG D6 gas production which averaged at 33.0mmscmd against 35.5mmscmd in Q4FY12. Better than expected GRMs, higher other income and rupee depreciation led to 5.6% QoQ jump in profitability at Rs44.7bn.

- Complexity benefit starts accruing to RIL: Although Gasoline-Crude and Naptha-Crude cracks remained depressed in Q1, RIL benefitted from expansion in Light-Heavy and Sweet-Sour differentials. The company also received higher premium for its Euro IV/V diesel thus benefitting GRMs which averaged at US$7.6/bbl (Reuters Singapore Complex GRMs at US$6.7/bbl). Incrementally, complexity is likely to act in favour of RIL.

- Polymer demand strong, polyester margins take a beating: Domestic polymer demand remained buoyant with over 22% YoY increase while PP margins remained depressed due to lower PP prices globally. Polyester and intermediates suffered from lower prices and margins owing to depressed cotton prices. Hence, petchem margins (EBIT) were muted at 8.0% with EBIT at Rs17.6bn declining by 20.7% YoY and 19.2% QoQ.

- KG D6 gas production averages 33.0mmscmd in Q1: KG D6 gas production further declined to 33.0mmscmd during Q1 from 33.5mmscmd in Q4FY12. Without any incremental investments, the gas production is likely to decline over the next 6-8 quarters.

- Approval of integrated development plan to raise gas production to 60mmscmd remains a catalyst: The company is expected to submit an integrated development plan for all its assets in 2012 so that development can start in 2013 and gas production can be increased to over 60mmscmd in next 2-3 years. Government approval for the integrated plan remains a key catalyst going ahead. Also, meaningful use of cash for inorganic initiatives would be a sentiment booster. RIL's shale gas business witnessed traction during the quarter with EBITDA of over US$96mn. Investment in this business remains the focus for RIL which is expected to contribute over 10-15% EBITDA to consolidated profitability by 2015. We do not foresee any significant catalyst from the legacy businesses of refining and petchem in near term. However, the key trigger for the stock is the approval for the integrated development plan for enhancing gas production. Based on the recent E&P performance, we have reduced our oil and gas production assumption from KG D6. Also, we have revised the tax assumption based on management guidance. Incorporating the changes, we maintain our 'Neutral' rating on the stock with a slightly revised target price of Rs806 (earlier Rs819).

Source : Equity Bulls

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