RIL - No major catalysts - Centrum

RIL Q2 results were largely in line with GRMs at US$9.5/bbl and PAT at Rs53.8bn. The refining segment reported better performance which made up for stable performance by petchem. Higher other income due to over Rs792bn cash led to 20.2% QoQ improvement in PAT. KG D6 gas production further declined to 28mmscmd in Q2. Incrementally, the revised FDP approval for KG D6 and MA fields remains a near term catalyst for the stock.

- Exogenous factors favour GRMs' uptick: Refinery outages in the US, Asian region and in Europe led to expansion in all product cracks thus leading to a substantial jump in GRMs. Sequentially, the Singapore Complex GRMs improved from US$6.7/bbl to US$9.1/bbl while RIL's GRMs jumped from US$7.6/bbl to US$9.5/bbl. We believe the GRMs will moderate once the outages come on line.

- Slowdown in China but domestic petchem demand still robust: Domestic petchem demand remained healthy with over 17% YoY jump in polymers and 9% YoY in polyester. Devoid of any margin expansion, sequential petchem margins (EBIT) remained muted at 7.9% (Q1-8.0%) with EBIT at Rs17.4bn declining marginally on a QoQ basis and substantially by 28.2% on a YoY basis.

- Further decline in KG D6 gas production: KG D6 gas production further declined to 28.2mmscmd during Q2 from 32.1mmscmd in Q1. This declining trend is likely to continue at least in the near term.

- Awaiting revised FDP approval for KG D6 and MA fields: RIL submitted its revised FDP in August. Though it has been approved by the management committee (MC), a formal approval is pending which is expected in Q3. Post approval, the company can go ahead with its development plans to arrest the decline and improve production. Its Shale gas business did better in H1 with revenues of US$253mn and EBITDA of US$198mn. RIL is focusing on this business and cumulative investment has crossed US$4.8bn. We believe GRMs will moderate in Q3 post the re-start of refineries shut down in Q2. Petchem margins are not likely to improve unless there is a demand jump in China. Also, rupee appreciation is likely to put pressure on refining and petchem profitability (boosted in H1 due to rupee depreciation). Thus we believe the revised FDP approval for KG D6 and MA fields remains the near term catalyst for the stock. We have revised our oil and gas production assumption from KG D6, tax rate, exchange rate etc. Incorporating the changes, our EPS for FY13E and FY14E stands at Rs63.5 and RS62.8 respectively. We maintain our 'Neutral' rating on the stock with a slightly revised target price of Rs808 (earlier Rs819).

Source : Equity Bulls

Keywords