Jul 19, 2013, 07.56 PM | Source: CNBC-TV18
Gagan Dixit, Oil & Gas Expert of Quant Capital believes that Reliance Industries first quarter earnings were mainly benefited due to sharp fall in rupee.
Gagan Dixit (more)
Analyst - Oil and Gas, Quant Global Research | Capital Expertise: Equity - Fundamental
"The rupee benefit has lead to the year on year improvement in their earnings, that is mostly in line as per we expected," Dixit said.
The company which runs biggest refinery complex in Jamnagar posted a 19 percent year-on-year rise in June quarter profit to Rs 5352 crore, on the back of strong gross refinery margins. Sales have, however, declined to Rs 87645 crore, down 4.5 percent Y-o-Y.
Q: Based on these numbers what is your call? Are these in line numbers ahead of expectations or have they fallen short?
A: These numbers are slightly better than our expectations of around USD 52.50 billion. GRMs has slightly positive surprised us and definitely other income also additionally that is the key thing otherwise oil and gas and petrochemicals are more or less in line with expectations. The rupee benefit has lead to the year on year improvement in their earnings, that is mostly in line as per we expected.
Q: They have other income within that they have Rs 1628 crore of interest income and there is net expenditure of about Rs 569 crore?
A: From the income it is the cash liquid investment what they are getting. That is contributing. Many times there is also the dividend that has lead to some variations on their part. There is also the impact of foreign currency denominated the investments which varies with the changes in the currency that has also impacted in this quarter.
Q: What is your call on Reliance Industries now it has rallied quite a bit ever since that gas price hike was announced. We have seen quite a bit of rerating of Reliance which we haven't seen for quite some time? What is the call on Reliance Industries at Rs 920?
A: I will buy at Rs 925 and there are lots of triggers which make me buy. First, is the gas price hike; it is not just the gas price hike that led to higher running in the stock it is also the reserve additions. When one definitely sees this recent NIKO annual reverse filing, they have increased their reverse pricing of the KG-D6 output. Higher prices makes their development plan viable.
Additionally I expect at least USD 8 to 10 billion EBITDA increase primarily to come from the US shale production. That would further improve their earnings. There is this polyester chain expansion project that will commission in FY14 and fully ramped up in FY15 so that has also lead to the earnings growth. There is INR depreciation impact that will benefit its entire segment, so these are the multiple triggers for Reliance and that is why I believe it is a buy at this level.
Q: What is your sum-of-part methodology telling you in terms of the stock price?
A: My value comes at around Rs 1020. Recently its growth came from the gas price hike that has lead to around Rs 50-60 addition in the last month. We assume that they can make USD 8 GRM. We have taken the conservative number of 6 times EV/EBITDA for both petchem and refining business.
Q: Would you be buying the stock on Monday or would you be booking profit?
A: I believe that Reliance stock is not impacted by the earning, it is most driven by how the analyst meet, how the things pan out, the company’s plan about the various business segment and what is going on and what is their view based on it. That is usually the key driver factor so, we are waiting for that. There are many other things that are beyond the company, like GRMs which the market has already factored in. At this level if all the things remain same then I will buy Reliance for long-term. I don’t think these results would have any meaningful change in Reliance on Monday.
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