RIL stock price to touch 4 digit: SP Tulsian

Reliance Industries (RIL) Q3 earnings released today beat the street estimates with net profit up 24 percent to Rs 55.02 billion from Rs 44.4 billion a year ago due to higher gross refining margins (GRMs) and good show from its petchem segment.

CNBC-TV18 interviewd SP Tulsian of sptulsian.com to know his reaction on RIL's better-than-expected performance for the quarter ending in Decmber. Tulsian expects Petchem to outperform in future as well. “Petchem will be a kicker because refining is reaching its height and it may not be possible to pull it beyond, but overall excellent numbers on Petchem,” he adds.

Below is an edited transcript of Tulsian’s interview on CNBC-TV18 Q: What are your reactions on Reliance results?
A: Excellent numbers. I would say that Petchem. Firstly, on the refining front, the street has been expecting much lower GRMs, while I estimated it to be at USD 10.1 but they have delivered excellent on the refining front so no argument, no dispute on that.
But if Petchem has been a big surprise. People have been taking a call that the weakening rupee will help, because they source majority of their crude in dollar terms. They buy the raw material in dollar and realise the import parity price for Petchem so there is very good expansion in the Petchem margin which is at 8.7-8 percent on the EBITDA front and are able to maintain this kind of Petchem margin.
Going forward, Petchem will be a kicker because the refining is reaching to its height, it may not be possible to pull it beyond but overall excellent numbers on Petchem.

Q: What has led to this improvement? Is this partly demand and what about spreads, how do you see them?
A: If one goes by the production details, the production has been constant or sub 5.5 million tonne and that is very positive. The sequential top-line is 22,053 exactly what the company has posted in Q2, despite of that they have posted an increase of Rs 200 crore in EBITD. We all know that they are going to ramp up their Petchem production. Their Petchem production has been remaining stagnant at 5.5 million tonne for last 3-4 quarters.
We have not seen any quantitative increase happening. These Q3 numbers that we are seeing, is more because of the margin expansion. Once the Petchem capacity addition comes in and the quantity gets increased that will be a big booster. All the eyes that you have capped for your refining margin maybe between USD 9-10, but all the eyes will now be on the Petchem with quantity expansion.
If they have margin of 8.5 to 9 percent on the EBITD front, that can increase their PAT by Rs 300 to Rs 400 crore. The upstream which will be required to settle the problems with the government and will increase their upstream production and hence their next growth driver will be coming in from Petchem.

Q: After Moily came in there was an expectation that it would improve from hereon, do you think 5-6 months from hereon is the time when we get some clarity on this being crystalised for March 2014?
A: If one connects this with political calendar, firstly, 4.2 mmbtu rate is expiring on March 31, 2014 and by then we will be having elections. Will the government have the courage to settle rate of anywhere, whether USD 7-8, that is not material, which will be seen as 80 to 100 percent jump.
In October 2013, the EGoM decides that the price will be USD 8-7 from April 1, 2014. What will be the scenario? In May 2014, new government will come in and how will they view it? We settle the rate and then it could become a political agenda also.

I am very apprehensive that unfortunately the rate of USD 4.2 is expiring on March 31, 2014 which coincides with general election. The things will be taken by the new government which comes in power in May 2014. I have my doubts that government will be having courage as of now looking at the developments and the political calendar which is matching with the events lying ahead.

Q: Do you think the stock has bottomed out? Where do you see the near-term levels in the stock?
A: This will be seen very positive by the market largely it is consecutive. Maybe in Q2 people had some apprehension whether they will be able to maintain this kind of margin on the refining front or not, that has been established. The Petchem now has started performing.
The quantity increase will be the kicker for Petchem division in the times to come. So, people have the confidence. If one goes by the poll, the market estimates which have estimated the PAT to about Rs 5,050 crore, indicated that there was apprehension. The market is bound to receive this very well, but we should not forget that the share price has run up to a good level.
Maybe to a price of about Rs 900, but I don’t expect that the profit booking will come which we see in case of many stocks. Maybe the upward trajectory will continue but this could see a rise of another about 4-5 percent from hereon. Rs 930-Rs 935 should be the level in the next one week. But, yes going forward the stock is heading towards four digit mark.