Earnings in line; high GRM levels unsustainable: JM Fin

In an analysis of RIL earnings on CNBC-TV18, Mehul Thanawala, VP-research JM Financial says that while earnings are in line with expectations the high levels of gross refining margins (GRM) are not sustainable in the long run.

Thanawala adds that the stock was upgraded to a 'buy' a month ago on announcement of a hike in gas prices by the company and depreciation in the rupee. Below is the edited transcript of the analysis on CNBC-TV18 Q: What is your view on the earnings?
A: We expected the net profit to be at USD 53.1 billion. So its almost in line, only about USD 0.4 billion higher than expectations.
In our estimate, the performance of the petrochemical segment was positive while the exploration and production (E&P) business performed slightly lower than estimates. While interest income on a quarter-on-quarter (QoQ) basis fell from Rs 1900 crore to Rs 1600 crore, I think this other income of Rs 500 crore helped get earnings in line. Q: What about Q2 because the quarter has started well in terms of GRMs ? What is your view on stock now going forward?
A: We upgraded the stock to a 'buy' a month ago when the government announced hike in gas prices and forex depreciation was seen as a positive for the company in the near-term. However, I do not believe that it is sustainable in the longer term. Q: How do you evaluate the company?
A: We evaluate the company by looking at each business separately and together and then add the cash reserves at the end of the year. As we await more details from the company, our fair value is at Rs 947. Q: On Monday, would you advise investors to accumulate or book profits because the stock has rallied quite a bit?
A: We will be most likely sticking with our estimates until the management issues a commentary. We have already included the gas price hike in our recent valuation upgrade when we moved the stock to Rs 947. So, I don't think we will be making any changes to our fair value of Rs 947.