Analysts largely hail Reliance's Q4 performance; retain positive calls on stock

Reliance Industries witnessed a surge of over 3 percent intraday on Tuesday as investors cheered the company’s better-than-expected results. Analysts, too, have given the numbers their thumbs-up as well.

The petrochemical major's quarterly earnings beat analysts' expectations on Monday as profit on a standalone basis grew by 1.6 percent sequentially to Rs 8,151 crore for January-March quarter. Net income on consolidated basis rose 7 percent to Rs 8,053 crore QoQ.

Standalone revenue from operations during the quarter increased 12 percent quarter-on-quarter to Rs 74,598 crore while consolidated revenue soared 10.33 percent to Rs 92,889 crore, the company said in its filing.

Reliance reported gross refining margin for the quarter at USD 11.50 a barrel, which was far ahead of analysts' estimates of USD 11 a barrel and outperformed Singapore complex margins by USD 5.2 a barrel. It had posted GRM at 10.8 a barrel in December quarter.

The company’s stock was in the news recently when it surpassed Tata Consultancy Services (TCS) in terms of market capitalisation and also became the most valued company in the country. Analysts have largely given positive calls on the stock, driven by a reduction of capex cycle in sight and better metrics in the results.

Citi maintained its buy call on the stock with an increase in its bull case target to Rs 1,923 due to higher Jio valuation and lower peak net debt. It believes that the company’s outperformance could sustain as the earnings are at an inflection point. Among key risks to the stock are weakening in refining fundamentals and global petrochemical spreads, the research firm added.

Analysts at the firm termed the company’s March quarter performance as strong, with the standalone EBITDA being 3 percent ahead of estimates. Meanwhile, the profit after tax (PAT) was largely in line, it said. Gross refining margins of USD 11.5 per barrel were above its estimates, it said.

On the company’s capex plans, it sees standalone capex being lesser than USD 2.5 billion in FY18. Jio’s capex in the first quarter of the fiscal will be similar to March quarter before declining sharply, it said.

Nomura maintained its buy call on the stock as well, but with an unchanged target price of Rs 1,540. The brokerage house observed that the net profit was 1-2 percent ahead of its estimates, driven by lower tax rate. It too feels that the recent outperformance of the company could sustain.

However, the earnings before interest and taxes (EBIT) and profit before tax (PBT) were below its estimates on the back of higher depreciation and lower other income. These numbers too were partly offset by lower finance costs, it added.

Going forward, it sees earnings growing ahead once Jio, petchem and refining expansion projects start to deliver. It expects consolidated EBITDA/PAT CAGR of 19 percent/15 percent, respectively over FY16-20.

Meanwhile, it observed that high capex on Jio continued during the quarter and expects similar capex in Q1 of this fiscal. The near-term focus will be on addition in customers of Jio. Having said that, it feels that the large capex cycle is coming to an end.

Bank of America Merrill Lynch has downgraded the stock to neutral, but increased the target price to Rs 1,450 from Rs 1,375. The global brokerage firm observed that the firm’s March quarter net profit was 9 percent above estimates, while refining beat was led by GRM.

Analysts at the firm now have the focus on Jio’s success and the capex cycle. They believe that a further rerating on the stock is contingent on a successful Jio P&L as well as falling capex. It further added that while capex could decline, there is limited visibility on a successful Jio P&L.

The stock could find support from growth in Jio’s monthly subscribers, while weak margin, project startup hiccups and high capex were the key risks, Bank of America Merrill Lynch said.

Morgan Stanley, meanwhile, has an overweight rating on the stock as it saw upside risks from improving energy margins as well as project executions. A steady project pipeline commissioning from FY18 should reduce the risk of further capex, it added.

JPMorgan is neutral on the stock with an increased target price of Rs 1,310 from Rs 1,240. While the lower capex in its core business was positive, Jio was the key unknown element, it said. Further extension of discounts by Jio would be negative, it added.

Rolling forward its valuation to FY19, Deutsche Bank raised its target by 10 percent to Rs 1,600. Lower downstream margins, policy vagaries were the key downside risks for stock, it said.

The stock has moved around 12 percent in the past one month, while its three-day gain stood at 5 percent. At 11:04 hrs, Reliance Industries was quoting at Rs 1,437.90, up Rs 21.50, or 1.52 percent on the BSE. It touched a 52-week high of Rs 1,465.00.