Reliance Industries - Refining and petrochemicals business under pressure - IIFL

We expect GRMs to remain flat in FY14 as a slow demand growth is more than offset by net capacity additions. RIL GRMs will move in line with the benchmark as the benefit of complex refiners is eroding with declining heavylight spreads. Petrochemical margin outlook is also bleak as low cost gas based capacities come up in the Middle East and demand remains weak. These two segments account for 98% for RIL's revenues and 85% of EBIDTA. FY15 could see a recovery in performance of both segments especially that of petrochemicals as RIL's new capacities commence operations.

Gas prices to rise... but volumes is the concern

After the initial promise of 60mmscmd gas in KG-D6, the company has faced water ingress and various geological issues at the basin leading to a consistent decline in production volumes (current volumes below 20mmscmd). With government putting a pre-condition of CAG audit for any further capex approval in the block the matters have complicated. As per Niko resources (10% partner in the block) recovery in production is expected not before FY15 when the satellite fields commence production. However, approvals would remain the key for this to be achieved. In the near term, gas price hike for the APM fields will be a positive and will set the path for RIL's gas price review scheduled in April 2014. Strong growth in revenue and earnings from shale gas business bodes well for the company.

Cash utilization and progress of other investments keenly watched

At the end of Q3 FY13, RIL had net cash and cash equivalents of US$14.7bn. Other income, which mainly comprises of interest and dividend income on these investments contributed 30% of the PBT in 9m FY13. While the company has laid out plans for investments in petrochemicals, we believe with strong cash flow of years, the company will have to seek more investment avenues. Traction in its telecom, retail and SEZ subsidiaries would also be keenly watched. While the stock has underperformed broader markets, we don't foresee a re-rating until 1) material recovery is seen in refining and petrochemical spreads and 2) gas production volumes is revived.

Source : Equity Bulls

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