RIL results may not be able to cheer market: Tulsian

In an interview to CNBC-TV18, investment advisor SP Tulsian of sptulsian.com spoke about his reading of Reliance Industries' Q4 numbers and the road ahead for India's largest private sector company.

Here is the edited transcript of the interview with CNBC-TV18

Q: Did the topline disappoint you?

A: I don’t think that topline is too relevant because sometimes you have the crude procured at a lower rate and similarly, you have the finished products contract also happening at that rate. We have seen the fluctuations of about USD 8-10 happen in that quarter. So, I really don’t go by the topline number, which is very relevant for Reliance Industries.

Also Read: Reliance Q4 net up 32% on refining margin rise; sales down

Q: USD 10.1 on gross refining margin (GRM) and other income of Rs 2,243 crore, how would you look at it?

A: If you go by the numbers I think looking at the interest income of Rs 1,980 crore, there is a jump of about Rs 375 crore. Even if you see the interest expenses, strangely that has gone down by about Rs 100 crore.

So, if you just take this interest figure, I think there is an increase of about Rs 475 crore straight away on account of that. So, largely the disappointment comes on account of the refineries segments also in spite of GRM of USD 10.1. If you see the EBIT that was at Rs 3,615 crore for Q3, while for this quarter it is Rs 3,520 crore.
That means, there is a drop of about Rs 95 crore in spite of the GRM. This has to do with lower volumes because there was shutdown of one unit out of the four units of the company. So, probably,that reconciles with lower revenue on account of the - Rs 77,872 crore, because there is a drop of about Rs 9000 crore on account of the refining segment.

So, though you have double-digit GRM which is very much in line or I would say that that has breached expectations, because of lower volumes, maybe the capacity utilisation which used to be at about 106-107 percent usually for the company may have been at about 95-96 percent or maybe 97 percent or so.

Q: The other number that we keep discussing is this whole provision for deferred tax and that’s where we have seen a bit of an impact, Rs 116 crore minus?

A: For Q3, we had an income that means write-back of the deferred tax, while in this quarter they have provided the deferred tax of Rs 116 crore. So, if you sum up the whole thing, the accretion in the profits or maybe at the profit before tax (PBT) level has happened by about Rs 475 crore because of the reduction in the interest expense by Rs 100 crore and increase in the interest income by about Rs 375 crore.  So you had an increase of Rs 475 crore that has been eaten away by the deferred tax by about Rs 135 crore, I am referring this sequential on Q3 and Q4.

So, the net accretion on account of the interest alone is about Rs 340 crore.
The fixed cost element has really taken away the major EBIT of the upstream sector. If you see the drop in the gas production, which has now estimated to be at about 16 mmscmd, has really eaten away the major chunk of that.

So in fact, the drop of about Rs 130 crore on account of EBIT on a sequential-basis on the upstream also seems quite high, and if you calculate the margin that will be seen at about 24-25 percent, which is again very disappointing.

Q: Would you agree that these results would not move the stock and incestos will now start focusing on what’s been happening with gas pricing because even with GRMs, as we were discussing they have fallen over last couple of weeks. So, there is a bit of a concern from the highs of USD 11 that we saw in the second week of February down to about USD 7-8. How to take a stock call now going forward?

A: The highlight of this result has been the contribution from the GRM because again, if you see, 4.52 percent EBIT margin seem to be quite good and as you have rightly said that we are not going to see this getting extended for the Q1 as well.
So, definitely, there will be neutral effect of that or if the gain of better results having posted by the refinery will get neutralised. To come on the petchem segment, again, we have seen an EBIT margin of 8.55 percent.

Market has been quite hopeful that petchem will be more or less showing atleast 8.8 percent EBIT, what the company has posted for Q3, so I will take that as a slight disappointment, maybe on the other core business front.

Upstream has really been a negative because if you have a drop of about Rs 100-110 crore in a quarter on a sequential basis, you are going to see a similar kind of performance, you are not going to see the more than Rs 450 crore as the EBIT from that division, which otherwise used to contribute Rs 550-600 crore, so that will also be seen negative.

Now if you are compensating or if you are recouping the reduction or fall in your margin by interest income, again, the question comes before people that is this the prudent strategy, because if you see the consolidated numbers, in my view again, on a net basis, now they are a debt company.

They are not a zero-debt company because it roughly gives Rs 89,000 crore debt on the consolidated basis. I am taking short-term, long-term and they have cash and cash equivalent of about Rs 80,000 crore. So, they have net debt of Rs 89,000 crore.
So, it seems that company is trying to squeeze the cash for earning, maybe little higher interest income and delaying payments to the suppliers or deteriorating the current ratio. So the overall focus seems to be more on the company to earn the interest income, which I think will not be liked by the market. 

So overall, I am not too disappointed with the results, but I don’t think that that will really be able to cheer the market. So what is left before the people or before the market is the futuristic call on their retail, telecom, or maybe on the gas price hike front or maybe the clarity on the gas output hike. So, these are the broad areas, which market will really be looking at.

Q: Time to look at shale gas or not quite, from USD 2, prices have gone up to USD 4. The numbers suggest 7-8 percent EBITDA would have come from shale gas and I was looking at a report which also mentioned that maybe it is going to be the next big trigger?

A: I won’t be factoring in this for FY14 because in real if you see these kind of things happening, maybe increase in the revenue by about 100 percent is happening on a very low base or on a very low quantity. In fact the acceleration in the production of shale gas in my view at least will take 18-24 months. So, honestly you cannot factor in for FY14.

Coming on the earnings per share (EPS) front again because we have all been individually or on an standalone basis have been tracking the EPS of the company which is at about Rs 65 on a standalone basis and on the consolidated it is Rs 70, because on the consolidated basis they take the reduced equity at about Rs 2,970 crore.

They knock of that 10 percent stake which is held by the subsidiary which is obviously the accounting adjustment. So, I think that the Rs 65 EPS on a standalone basis – I am not incorporating – yes the retail EBIT positive is a good thing but that was again indicated by the market. So, I don’t think that anything extra or any surprise has come.

The only negative is increase in the interest income which obviously any fundamental analyst will not really be very happy with these kind of improvement in the bottomline because of contribution from the interest.

So, what my point is that on the consolidated basis you are not having nay kind of kicker coming in either from the shale gas or from the retail which will eventually be adding to the bottomline of the company. They will all be very good indicators but they will probably be seen more 18-24 months down the line from hereon.

Q: Oil and gas is a big disappointment for this quarter. As you said upstream is a big disappointment and that is something that the market will be worried about?

A: Let us understand that revenue has not corrected, because they are getting the fixed price of USD 4.2 per mmBtu. But it is very difficult for any fundamental analyst to take a call because you get to lay your hands on the newsflow that okay, production has fallen to 22 mmscmd, 21, 20, 19,18, 17, so it is very difficult for you to work out.

However, inspite of taking a ballpark number, which we all analysts have taken and as you have rightly analysed said that the expectation of Rs 560 crore was there on the EBIT front, that means the production must have fallen much earlier than what it has come in the public domain. If you really see the drop of about Rs 330 crore, which amounts to about 15 percent and if you try to take the reducing valence (not sure) method average also, I don’t think that it works out so much.

So probably, the reduction has happened in the beginning of the quarter and that is seen reflecting into the poor upstream numbers.  We all know that refining is the real segment for them. It contributes Rs 3,500-Rs 3,600 crore EBIT.

If you take this Q1 scenario, generally there is a thumb rule that whatever relative fall you see in the crude, which we have seen a 15 percent fall in relative terms. Two third of that is seen in the reduction in the GRM also. That means if 15 percent fall has been seen in the crude oil prices, you take a ballpark that 10 percent of the reduction will happen in the GRM.

So if the company has USD 9-10 per barrel as GRM, obviously that will fall to USD 9 per barrel. Apart from that if you squeeze the differential now between light and heavy, which has also happened by about USD 1 at least, that means we are not seeing a scenario of more than USD 8 per barrel as a GRM. If I stick my neck out and take a call on Q1 GRM, I don’t think that it is likely to – it will be somewhere USD 8, maybe 10 cents plus or 10 cents minus.

So obviously, the situation really becomes a little dull. Going forward in Q1, you might see a reduction in the EBIT by about Rs 400-500 crore. So, will the company be able to continue with the momentum of showing the bottomline at about Rs 5,500 crore or we are going to see a jerk where the bottomline will be seen at about Rs 5,100-5,200 crore.

So, this is the situation which emerges as of now because you won’t be able to salvage that fall of your refinery EBIT from your upstream, you won’t be able to see much increase or much jackup happening in the petchem segments. You can’t really stretch your interest income beyond a point, which I have seen it happening maximum in this quarter, to the level of about Rs 2,000 crore or so.

So yes, Q1 will be really very interesting and again people probably will be more worried or will be taking a cautious view on Q1. I don’t think that there will be much disappointment from this Q4 numbers, but going forward they will be little cautious and bit worried.

Q: This is not the kind of numbers, given the kind of environment that we have, that should take the stock back to say Rs 850 or Rs 900 kind of zone. That is the worry for an index heavyweight. Maybe there is now a struggle to cross Rs 820 or so in terms of stock.  In that sense what is your call on the stock?

A: Rising crude prices has been of help to any refinery, whether you talk of Essar Oil or of Reliance Industries. The point which you have touched upon that market was apprehensive or market was expecting the differential or GRM differential getting squeezed between light and heavy. Because of that, the market was expecting GRM to be lower. But already that squeeze has got enlarged or increased by about additional USD 1 because of the fall in the price.

Now, coming back to your point. Definitely, the things are if you see a good rally in the stock price, it is very difficult to say whether Reliance Industries has also crossed on the hopes of better numbers, or in line with the general rally in the market because market rally has been very restrictive.

We have not seen that getting spread into oil and gas, as oil marketing companies are going up because of their other reasons, Oil and Natural Gas Corporation (ONGC) kind of stocks are again going for their other reasons. So, I think that probably market, the Reliance Industries will remain away from these ups and downs in the market. Whether market goes down or whether the market goes up, it will not be the performer or maybe the underperformer.

The market will be taking a little cautious stance going forward from hereon. So, I don’t think that Rs 840 can be seen getting breached very easily.

Q: We had Nayantara Rai breaking the news that after the Rangarajan Committee, the government may actually now want Kelkar to look at this particular issue of gas pricing and if it doesn’t happen in four months, then you are looking at maybe April of next year. Can we look at this as a trigger or no because at the end of the day it is still some time away.

A: There are two ways, whether you see a glass half full or half glass half empty. Firstly even if the gas price hike is likely to happen it won’t happen before April 1 2014 because the government has been very clear that the USD 4.2 mmBtu gas price which was fixed from April 1 2009 was for a duration of five years. If the government does anything -implementing it prior to that will be seen very negative by the market, all kind of allegations which I don’t think that government will – and that too when the allegations are all there of the coal gate and CAG this one and all that. So, I don’t think that it will be possible to have any kind of price hike getting implemented from April 1 2014, one.

Now take the scenario for some reason we have all been, we don’t know the approach and behaviour of the supporting parties sometimes SP, NCP, BSP – suppose for some reason if the government is not able to decide on. As Taneja has said that it is likely to get hiked in next three to four months. For some reason if it has not been done by the government in the next couple of months or so that means the gas price hike point goes into the limbo.

That means the new government which will come in will only be looking after this agenda which is not going to be taken up before July or August 2014. So, what is the scenario in that case, what are the points in favour of the company maybe chances of 25 percent, which will be implemented from April 1 2014.