Reliance Industries - E&P to act as a trigger - Centrum

Reliance Industries' performance in Q4 was largely in line in terms of profitability but operationally it faced headwinds from petchem and E&P segments. GRMs were better than expected at US$10.1/bbl against US$9.6/bbl in Q3. Pressure on the polyester segment (with lower volumes) led to a sequential decline in petchem EBIT margins at 8.6% vs 8.8% in Q3. KG D6 production averaged 19.0mmscmd thus aggravating the pressure. The outlook on legacy refining and petchem segments is largely stable though outlook on E&P is improving with the start-up of drilling activity in the KG block. We believe negatives are largely over for RIL and any positive news flow from E&P (discoveries, gas price hike etc.) will act as a trigger for the stock. Valuations seem to have bottomed out at the current market price and we maintain 'Buy' rating on the stock with a price target of Rs943.

Double digit GRMs: RIL reported double digit GRMs of US$10.1/bbl in Q4 on the back of strengthening petroleum product cracks. Hence, although utilisation was lower by 8.0% QoQ at 16.1mmt in Q4, the EBIT for refining was lower by only 2.2% QoQ at Rs35.2bn.

Pressure on polyester and low volumes impact petchem performance: Although polymer demand and margins were better, polyester demand and margins remained under pressure in Q4 thus impacting petchem performance. EBIT margins declined from 8.8% in Q3 to 8.6% in Q4 with 2.2% QoQ decline in EBIT at Rs18.9bn.

KG D6 volumes average at 19.0mmscmd in Q4: Rapid decline was observed in KG D6 volumes which went down from 23.7mmscmd in Q3 to 19.0mmscmd in Q4. Refining EBIT thus dropped by 22.0% QoQ at Rs4.6bn.

E&P to act as trigger: Although RIL's Q4 performance was slightly muted operationally, profitability was largely in line with elevated by higher other income. Operating profits declined by 8.4% YoY in FY13 at Rs307.9bn, but lower amortisation and higher other income led to 1.7% YoY increase in bottom line at Rs210.0bn. E&P investments have kicked off from Q4 and should start yielding results over the next few quarters by arresting the current production decline and increasing production thereafter. We believe E&P would act as a key trigger for RIL going ahead with positive news flows on discoveries, gas price hike etc. Based on the recent results and outlook we have reduced our gas production and GRM assumptions while raising our rupee-dollar exchange rate. Incorporating these changes, our EPS for FY14E and FY15E stands at Rs66.2 and Rs76.0 respectively. We remain optimistic on RIL and maintain 'Buy' rating on the stock with slightly revised target price of Rs943 (earlier Rs947).

Source : Equity Bulls

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