Jan 21, 2013, 02.39 PM | Source: Moneycontrol.com
Emkay Global Financial Services has recommended hold rating on Reliance Industries (RIL) with a target price of Rs 834, in its January 18, 2013 research report.
, Emkay Global Financial Services |
"RIL results were above street and our expectations. Net profit up by 23.9% YoY to Rs.55bn on back of higher refining and petchem margins. Gross refining margins (GRMs) stand at $9.6/bbl, flat QoQ, better than our/street expectations of US$9/8.7/bbl. Petchem EBIT surprise positively at Rs.19.3bn, up 11% QoQ, due to better margins. KG D6 production at 24mmscmd, continued its declining trend, down 15% QoQ. Recent spate of E&P approvals augur well for company but still time for results to show up.
Refining EBIDTA at Rs.45bn were better than our /street expectations mainly on the back of better GRMs. Sequentially GRMs remained flat at $9.6/bbl, as against our and street expectations of $9/bbl / $8.7/bbl. Refining EBIT grew 2.6% QoQ to Rs 36.1bn. Although the benchmark Singapore refining margins declined in Q3FY13 averaging. At US$7/bbl as against US$9.3/bbl QoQ. This is on account of sharp decline in fuel oil spreads to US$(18)/bbl (US$12/bbl QoQ) which forms higher proportion of Singapore GRM product slate and better LPG/Naphtha spreads which form higher proportion of RIL’s product slate. Also increase in spread between light-heavy crude oil by US$1.5/bbl to US$4/bbl has helped RIL GRMs for the quarter. Refinery throughput for Dec12Qtr stood at 17.5mntons flat QoQ.
We revise our consolidated earnings estimate for FY13 to take into account better than expected Q3FY13 performance and performance of shale business. We also assume GRMs of US$9/bbl for 4QFY13 as against US$8.5/bbl earlier. Increase our EPS by 7.2% from Rs.63.2 to Rs.67.8 for FY13E. Our FY14E EPS changes by 5% to Rs.68.3 on account of shale business and higher GRM assumption at US$8.7/bbl as against US$8.5/bbl earlier. We introduce FY15E earnings with expected EPS of Rs.72.1. YoY increase in earning of 5.5% is on account of start of petchem capacities and increased contribution from shale gas business. While FY15 would be the full year for PFY/PTY/PET capacities to contribute to earnings, PX/PTA/MEG capacities are expected to start in 2HFY15.
While the concerns on declining gas production in KG basin have remained, RIL stock has moved up by 11% and out performed broader market by about 4% in the last 3 months. While the better performance during the quarter has come from both the core businesses of refining and petchem it’s too early to expect a sustained recovery in margins. We maintain our outlook of weak refining cycle going ahead on the back of higher incremental new capacity compared to incremental demand. Structurally, refining cycle is expected to remain weak with incremental net refining capacity additions expected to the tune of 1mbpd/1.3mbpd in 2012 / 2013, as against demand growth of 0.8mbpd / 1mbpd.
In case of petchem, demand remains a concern and any weakness in demand could impact any sustained recovery in margins. Gas production from KG basin is expected to decline further and is not expected to reverse the trend before FY15. Positive government stance towards RIL’s E&P efforts augurs well for the company but its still time before results come up. We factor in average gas production of 20/18mmscmd for FY14/15. We remain cautious on refining and petchem margins on the back of new capacities and/or weakening demand. The stock currently trades at FY14E PE multiple of 12.5x and 1.6x P/BV. We roll over target price to FY15E earnings and maintain Hold rating with target price of Rs 834," says Emkay Global Financial Services research report.
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