Brokerages remain optimistic of Reliance post Q3

The third-quarter numbers of Reliance Industries (RIL) has not muted brokerages' expectations who remain cautious-to-optimistic of the company's performance ahead. They believe the weakness is seasonal in nature and advise investors to hold or accumulate RIL shares. RIL posted a flat net profit of Rs 5,511 crore in the December quarter due to weak refining margins, low gas output and higher raw material, power and fuel costs. The quarterly net revenues stood at Rs 1.03 lakh crore, up 10 percent year-on-year. Brokerage house Antique has maintained a ‘hold’ on Reliance Industries but revised its target price higher. “We slightly revise our SOTP-based target price up from Rs 940 to Rs 950 assuming a weaker rupee. We, however, maintain our hold rating due to structural challenges to refining business and incoming seasonal weakness as winter demand passes by. While current GRMs have recovered significantly, visibility going forward is low. The fourth quarter also has a 15mmtpa 14 days shutdown,” the note said. Reliance’s GRM at USD7.6/bbl was down only 1% QoQ against 20% decline in Singapore GRM. This was due to favourable light heavy differential and improvement in naphtha cracks. Refining volumes, however, declined 4% QoQ to 17 mmt due to shutdown. Emkay retains accumulate on RIL with a target price of Rs 982 as it feels the third-quarter numbers were on track.  According to the brokerage, RIL's net profit of Rs 5,511 crore was higher than the consensus estimate of Rs 5,300 crore. It observed that the company's petchem EBIT margin declined to 8.4% against 10% (Q-o-Q) to Rs 2,120 crore, due to weak margins in PP, PVC and fibre intermediates.  “With expected improvement in RIL’s business profile in the next 2 years, limited downsides, potential upsides from positive developments in E&P and attractive valuations, we maintain accumulate, with a target price of Rs 982,” the Emkay note said.  StanChart too says RIL’s Q3 numbers were in line. According to the broking house, better E&P (exploration and production) has compensated for weak refining and petchem margins. However, it has trimmed its target from Rs 907 to Rs 891.  Kotak Institutional Equities has retained ‘buy’ on RIL stock while revising its SOTP-based target price to Rs 1,030 from Rs 980 by rolling forward to FY2015E estimates.“We expect the company to benefit from the recent improvement in complex refining margins, increase in domestic gas price effective from April 2014 and progress in new core business projects. However, we do see risks to fair value from potential large investments in the telecom segment, which may dilute earnings at the consolidated level in the medium term,” the brokerage note said.