RIL can face pressure in Q1, bullish on ONGC: Religare Cap

Post Reliance Industries fourth quarter result, Ballabh Modani of Religare Capital Markets feels that company’s first quarter result will be under pressure. The impact will come from gross refining margin (GRM) which has fallen sharply to USD 4.5/bbl from USD 10/bbl seen in January and February. This

He told CNBC-TV18 that Oil and Natural Gas Corporation (ONGC) is his top pick in the sector. Among the oil marketing companies (OMC) he likes Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL). Below is the verbatim transcript of his interview to CNBC-TV18 Q: What is your overall call on Reliance Industries post its Q4 numbers? A: The market was expecting more than USD 56 billion of profit. So, it has come exactly in line with what the market was expecting. The stock has moved above in the last two-three days. So, it is a sort of disappointment because there was no beat on the market estimates. The main reason clearly was that refining continues to do well for them, but petrochemical was where the company disappointed. We were expecting little higher margins than what EBIT margins did last quarter, but it was lower than that. So, it spoiled the operating performance. At the bottomline, it was in line, but it was largely led by other income. It is very critical whether what kind of value you would like to assign to the other income. Q: The other problem that the market seems to be factoring in now is that while in Q4 they managed to do USD 10.1, they have already fallen to about USD 7.5-8, should one be worried about the Q1 performance going forward? A: The fall has been pretty sharp. If you look at it from the highs of more than USD 10/bbl in the month of January and February, it has fallen to something like USD 4.5/bbl right now. So, clearly it will be reflected in Q1 numbers. Other worry for RIL is the falling differentials between light and ultra-heavy crude differentials, which has fallen to around USD 3-3.5. Again in the month of January and February it was as high as around USD 14-15. So, both these factors put together you will see pressure on the refining margins for Reliance in Q1. Q: Oil and gas production down, EBIT down, what is the call for the upstream business at all? A: It is largely known. The whole issue is that the production is falling and the operating cost does not fall in the same proportion. So, it was largely in line of what we were expecting. There is not a disappointment, the guidance is critical for the exploration and production (E&P) business. RIL has guided that they will try to stabilise the production by July. They will do work over program in July and after that there will be some stability. So till then, we will continue to see the production falling. Going in Q1, the numbers are going to be much lower than 19 mmscmd that they did in Q4 of FY13. It will continue to remain under pressure. What remains to be seen as how fast the government comes out with the gas price reforms? That will provide some support to the stock. Q: What we hear is that the Kelkar Committee will be looking at what Rangarajan Committee recommended, should the market assume that the gas price hike will be pushed because of elections beyond 2014? A: No, India cannot afford to go lose on this subject. If you look at it, the production has already fallen big time. If India wants to see any incremental production coming to the market, they need to revise the price of gas sooner than later. So, I do not think election is going to make a lot of difference to it because India cannot afford another year without a gas price reform. RIL’s price is going to be applicable till the end of FY14. Before that itself the government needs to decide about the subject. We will hear about it in next one-two quarters itself. Q: What would be your top picks in the entire sector? A: We continue to like Oil and Natural Gas Corporation (ONGC). We firmly believe that the fall in the crude oil prices has been quite significant and this is one of the stocks in the E&P universe regionally, which will benefit out of falling crude oil prices. The other thing is that it is the gas price reform. India needs to take a decision about increasing the gas prices. If that happens, ONGC is a bigger beneficiary than Reliance. Both the verticals what we see is that there is going to be earnings upgrade for ONGC for FY14-FY15. That is the reason why we continue to like the stock. It is our top pick in the space. Q: What about oil marketing companies (OMCs) now that crude is at USD 100 per barrel or even a tad below? A: OMC is quite a tricky call. The major part of the reforms is already there. So, it becomes quite critical that how strong our view on crude oil is. Among the OMCs what we like is Bharat Petroleum Corporation Ltd (BPCL) followed by Hindustan Petroleum Corporation Ltd (HPCL). If we want to play pure beta on the crude oil prices, HPCL is the best bet. But again, the nature of the commodity itself is quite volatile. So it becomes quite tricky.