RIL Q4 nos: Thin line between good, bad and ugly numbers

Reliance Industries’ fourth quarter net profit of Rs 4,236 crore just fell short of the street estimate of Rs 4,300 crore. It was down 21% year-on-year. Sales, however, grew 16% to Rs 87,833 crore.

The gross refining margin (GRM) of USD 7.6 per barrel surprised the street. In an interview to CNBC-TV18, SP Tulsian, sptulsian.com says, the GRM is better. “Nobody was expecting GRM to cross USD 7 per barrel. This quarter we have seen the crude prices going up. They had USD 6.8 per barrel GRM in Q3. So, definitely this includes some inventory gain also,” he explains. However, he points out that despite better-than-expected GRM, the net profit was short of the expectation, that indicates that probably the petchem has taken more hit than what it was expected. According to him, from hereon, analyst will start taking a call on FY13 earning per share (EPS) estimates of the company. “In my view, it is likely to be at about Rs 55-56 per share,” he asserts. He further says, there is a deep disappointment on the upstream segment. "If you see the turnover, it has come at Rs 2,600 crore, while the EBIT is at Rs 951 crore. That gives the EBIT margin of just 36.5%, which traditionally is anywhere between 45-48%," he adds.  The other income, Tulsian says, is very high. "The company now largely depends on the four segments petchem, refinery, upstream and interest income. The market will definitely be not happy with the other income and interest income supporting or enabling the company to maintain the bottom-line with a deep drop in the upstream segments," he explains.  Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video. Q: Gross refining margin (GRM) is at USD 7.6 per barrel. What are your initial thoughts? A: Definitely, the GRM is better. Nobody was expecting GRM to cross USD 7 per barrel. This quarter we have seen the crude prices going up. They had USD 6.8 per barrel GRM in Q3. So, definitely this includes some inventory gain also. If you see the profit after tax (PAT), I am unable to understand that in spite of the improvement in GRM, the PAT, which was estimated to be Rs 4,300 crore, is at Rs 4,236 crore. That indicates that probably the petchem has taken more hit than what it was expected. From hereon, analyst will start taking a call on FY13 EPS estimates of the company, which in my view is likely to be at about Rs 55-56 per share. Q: You were pointing out about how it’s been about a year now, since BP made an entry, but there has been no significant progress. FY13 also doesn’t look like a bright ray of hope. Do you don’t expect any improvement in FY13, the whole fiscal? A: There is a deep disappointment on the upstream segment. If you see the turnover, it has come at Rs 2,600 crore, while the EBIT is at Rs 951 crore. That gives the EBIT margin of just 36.5%, which traditionally is anywhere between 45-48%. The drop of atleast Rs 300 crore has been there. The other income is very high. So, there is a lot of variation. One may say that slight positive improvement in the petchem, but big disappointment on the upstream segments. I will connect that with the FY13 projections. I had been saying that interest income, which you can loosely call as a treasury division, has been overtaking the upstream. So, company now largely depends on the four segments petchem, refinery, upstream and interest income. The market will definitely be not happy with the other income and interest income supporting or enabling the company to maintain the bottom-line with a deep drop in the upstream segments. If you extrapolate that for FY13, I don’t think that the PAT of Rs 20,000 crore, which has been reported by the company for whole of FY12, can be taken at Rs 18,000 crore. That translates into an EPS of close to about Rs 50. So, FY13, going forward, I think is giving a very bleak picture. And that will definitely be disappointing the market. If you take a price of Rs 725 for the stock, which is seen as a good support in view of the buyback programmes having initiated by the company, I don’t think that you will be comfortable with a PE multiple of 14-15. Even a stock like Infosys is ruling at that kind of PE multiple. So, it is a big disappointment, if we extrapolate this Q4 numbers largely on account of the upstream and the profit coming in more in the form of other income and interest income and all. Q: There is a lot of speculation about the telecom venture. There is expectation that it should be ready by this year-end, but they haven’t really moved on the towers front, the basic necessities that they need for delivering the telecom venture. By when are you expecting a movement on that? A: The expectation was that the headway will be made on the financial services and telecom by March 31, 2012. But we have not heard anything on that account. Infact the recruitment have taken place in both the divisions about 12-18 months back. So, in my view, that was overdue. Some positive indication should have come by March 31, 2012. That we have not seen. So, obviously, the things are getting delayed on telecom front as well as on the financial front. The worry is not on the financial front, but the worry is more on the telecom front because the outlay of USD 5 billion has already been made by the company, maybe close to USD 4-5 billion. So, if the delay happens on that account, obviously substantial part of your investments remains unproductive for that much time. Q: What’s your sense on the stock price? Do you think the buyback and the measures that management has in place to support the stock price will mean that Rs 710-720 is a very strong base for the stock?

A: I have been maintaining that come what may, the price of  Rs 725 will be seen as a very strong support. It is obvious that since the company has only initiated a buyback of 3.5%, it will be acting as a very good support.

 

Suppose this buyback shield would not have been there, the market would have been greatly disappointed with this results and share would have feel below Rs 700 and even now I am not ruling out the possibility.

 

I’m concerned more about FY13. If you extrapolate these results, which will indicate an EPS of about Rs 50, it will not be long before the company posts losses. The capex also has been very low at Rs 75,000 crore; that capex of Rs 12,000 crore consists of Rs 7,000 of forex losses or forex adjustment.

 

The market will be deeply disappointed that the company has been losing focus from its upstream business. That we have seen a drop of Rs 300 crore in this quarter alone means the situation is not going to improve further in  FY13.

 

So, I am highly disappointed and I don’t think that the market will really be even kind to this kind of results. I won’t be surprises to see the share slipping at around Rs 700 and even the company won’t mind waiting for to see those levels and then come in the market for the buyback.

 

I am not holding the positive view for the share to perform in the near-term.