Fall in RIL petchem EBIT saved by refining biz: Tulsian

Market analyst SP Tulsian of sptulsian.com explains to CNBC-TV18 in his analysis of RIL results, that the fall in the petrochem EBIT has been buoyed by refining segment.

Q:The EBITDA margins are at 7.34% versus 7.7% of the previous quarter. So, RIL has posted lower than the expectation of about 8%, though you really have to look at the segments seperately. What do you make of the results? How do you think the street will react? Are you looking at the positive contribution of refining or would you focus on petrochemicals which was supposed to be holding up?
A: If you see sequentially, there is a straight Rs 400-crore drop in the EBIT of the petrochemicals segment, which has directly contributed or compensated by the refining segments. The structure of the profitability of the company is more consistent, secular and linear in case of petrochemicals.
The fall of Rs 400 crore on account of the EBIT is not too comfortable because if you take USD 7.6 as the GRM (gross refining margin),  though I have estimated that to be at USD 7.9 for this quarter, there has been a disconnect with the benchmark Singapore GRM during the last three quarters.
 The petrochemical division has been outperforming the Singapore benchmark marginally. In the last quarter, the division performed poorly and did not match the Singapore GRM. So, I don’t think that one can really take a comfort from extrapolations of the GRM, which has been posted by the company.
An extrapolation of the petrochemical margins will provide very negative results for the company on the sequential EBIT of Rs 4,880 crore for this quarter, which was at Rs 4, 826 crore for Q4. So the loss of petrochemicals has been compensated by the GRM or by the refinery segments.
In the upstream segment, the EBIT is absolutely the same at Rs 972 crore as against Rs 951 crore in the Q4 of FY12. I view it as a glass half-empty because of concerns on 8.04% EBIT in the petrochem segment which has always been in the double-digits. It ruled at 12-13% in FY11, it fell to 10-11% in FY12 and is now at 8.04% in Q1 of FY13. Q: How would you explain the 17% QoQ drop in other income? Is there a forex element involved and what are your comments on the tax rate?
A: Generally, the forex element is always adjusted by the company in the reserves and the interest income is at Rs 1,291 crore against Rs 1,288 crore in the previous quarter as well.
Regarding taxes, there has been a deferred tax credit because RIL has provided deferred tax expenses. So regarding income tax, RIL  haS provided the same income tax liability, but as against the deferred tax debit which was at Rs 110 crore for Q4, there is a credit of deferred tax of about Rs 122 crore.
So, there is a swing of Rs 232 crore. If this non-cash item is removed, you arrive at the cash profit this Rs 232 crore. So there is an impact of Rs 232 crore, which if reduced from Rs 4,470 crore, comes to Rs 4,250 as the net profit of the company. So, the sharp decline of 3% of EBIT on petchem segment is worrying.
_PAGEBREAK_ Q: What is your initial reaction?
A: The 'other income' of Rs 1,900 crore also constitutes an income from interest. Even if I presume it is not likely to be more than Rs 1,300 crore that indicates that there is improvement in the core business of the company which  cannot really be expected from the upstream segment.
I think that surprises must be coming either from the refinery or from the petchem segments because upstream cannot be expected to post this kind of improvement. Q: Gas production has been a big issue. We know Ambani has made statements in the AGM about the 60 mmscmd target to be achieved over the next three years. But it is in the government’s favour too for an amicable resolution with Reliance. What do you think is in the offing?
A: I don't think that the reflection of that will be seen in the financials for FY13. All eyes are on the increase  in the price of gas because there are discussions in the market that this is probably a pressure technique by the company to raise the price from USD 4.2 per mmBtu, which is due for revision on April 1, 2014.
So there is time for an amicable resolution with the government that might help the company. RIL has not been able to ramp up production even the expertise of BP and regarding which we all have been very bullish for the last 12 months or so.
I am wary because these are all long-term plans- increasing gas production to 60 mmscmd of gas apart from supplies from the KG-D6 fields in the next three years.
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I am not really too comfortable as they are all the statements of intent and are likely to be achieved in the next three-to-five years, So in FY13, I don't think that any kind of reflection on the positive side will be seen in the financials of the company. Q: The telecom business is to fructify in the near-term. But Reliance has stated that according to its strategy, it doesn’t want to make an acquisition. Do you think tenancy is the solution? What do you expect in telecom and the 4G rollout?
A: Again, the company is tasting blood with the income made from interest. I don't think that company will really be courageous to make an investment of USD 5 billion for passive infrastructure which is unlike the acquisition of a office premises on lease or outright purchase which might be profitable as the value of property increases.
The value of towers are always depleting. So probably it will be more convenient and prudent for Reliance to go in for tenancy. So, RIL will be more comfortable using towers on a tenancy basis and continue to earn a quarterly income from interest of about Rs 1,300 crore. Q: As a stock market expert, how do you see the stock react and what is your trigger?
A: I am quite disappointed as the fall in RIL's petrochem's EBIT margins from 14.72% in FY11 to 11.13% in FY12 and 8.04% in Q1 of FY13 is going to disappoint the market too. I see the share rule below Rs 700 on Monday and Tuesday.
The company will be forced to continue with their share buyback programme, which is 30% complete or to be precise, 3.58 crore shares have been bought back out of 12 crore, which were earmarked.
The company will be forced to continue with its share buyback and there is no harm if continue to buy shares at an average price of Rs 715. I hope the buyback is completed by September 30 which will bring 6 crore shares back into the kitty.
There is absolutely no other trigger and the market will really be concerned with consistent fall of the petrochem margins- by 200-250 basis points on an annualised basis for the last couple of years.