Expect RIL Q4 profits to be flat: Edelweiss

Niraj Mansingka of Edelweiss expects Reliance Industries to report a flat net profit of Rs 5,541 crore in Q4. Last quarter, the company had reported profit after tax (PAT) of Rs 5,502 crore. Reliance will announce its Q4 result on April 16. 

Speaking to CNBC-TV18, Mansingka said he sees improvement in the refining margins for the company. He strongly feels that RIL’s shale gas business will lead to earnings growth in a longer term. Also read: Mkt in for breakdown; bet on ONGC,RIL: Sangeeta Purushottam Below is the verbatim transcript of his interview to CNBC-TV18 Q: What do you expect Reliance Industries to declare on April 16? This quarter most people expect it to be quite a reasonable one?

A: As far as Reliance is concerned, we expect them to report Rs 5,541 crore of profit, which is broadly similar to last quarter’s profits. Last quarter it reported Rs 5,502 crore in terms of profit after tax (PAT). Therefore, in terms of percentage increase, it is almost flattish in terms of profits. As far as breakup is concerned, we expect refining margins to report at USD 9.8/bbl compared to USD 9.6/bbl in last quarter. We see an improvement in the reported refining margins for the company. Q: At this point what are you going with in terms of price and earnings estimate for the stock though because Reliance has been suffering in the cash market?

A: If one is talking of earnings then it is of almost 21,000 crore of PAT, which broadly comes at Rs 70 earnings per share (EPS) on the net share basis. We are broadly close to consensus, but we are extremely positive on the capex that it is doing in refining and the petrochemical segment and the investments in the shale gas basis. In fact there are worries about refining margins coming down recently, which has let to some correction in the stock price. However, we are confident that refining margins will recover because our data base suggests that the refining capacity addition this year, FY14 is almost matching. In fact it is a tad lower than the refining demand of products, which to believe that refining margins will continue to maintain as similar as last year’s numbers. Since Reliance is a pure refining play, those will be the larger drivers of this year and next year’s earnings.

In a longer term as we stated that the investment in refining and petrochemical, which are critical for the company as well as shale gas, will lead to earnings growth in a longer term. Overall we see 15 percent compound annual growth rate (CAGR) in next three-four years. That should be the performance of the stock, probably slightly higher because the earnings growths will catch-up at the fag end of next four years. Also the next four years, two years of FY16 and FY17 are very critical as far as growth is concerned. Hence, we see the stock doing relatively much better because last one-two years there has been stagnation in earning for the company. Q: There was some excitement around the fact that there will be new gas discovery in the KG-D6 block, any more details you have been able to garner or you expect to hear in their result note?

A: The MJ1 drilling that you are talking of, when they started drilling, they came out with a release of low best and high estimate. Of the best estimate the estimated 0.8 trillion cubic feet (TCF) of gas, if they drill. That is not so exciting. However, the releases of British Petroleum, the BP Plc, they have spoken quite positive about the exploration upsides based on the MJ1 well and potential of some crude discoveries coming in, in case they are lucky.

Today we read that there maybe some significant discovery. We are keeping our fingers crossed. No more data points are known, but we also understand that there might be more drilling left because of the deeper areas of that particular well having oil and gas. So, that’s the information we have. However, we are fairly positive and wish them a good luck to find a discovery.

The point I am trying to make is that our positiveness on Reliance is not based on any exploration upsides. That adds value to our target prices the moment some announcement comes. Therefore, these are more positive news and nothing negative can be ascribed to. Q: Do you fear though that the recent weakness in refining margin can spillover to first quarter performance even if it does not affect the number, which is to be reported on Monday?

A: Yes, it definitely will because we are entering April first week with refining margins, which are very low numbers. Our day to day refining tracker that we have, we see run rates of USD 6-7 of refining margins for Reliance Industries. When one is entering a quarter with these numbers, this will have an impact on the Q1 numbers. However, we also know one thing that lot of refineries in Asia came back from maintenance season. As they came back together and this is generally a lean demand period, it led to refining margin correction and on daily numbers refining margins generally have been volatile. So, assuming that these numbers will be coming for the entire quarter is quite early in the period of time. We expect the rebound to happen in next month as well because lot of demand inventory starts getting build-up because of US summer season demand. Also globally as well as in Asia refining demand of products do start increasing in seasonality for the next two months.