Expect RIL to post $9.50-10/bbl GRM for next 2 qtrs: Macquarie

Agarwal further suggests a price target of Rs 1,280 per share on Reliance Industries over the long term.Disclosure: Reliance Industries, which owns Reliance Jio, also owns Network18, which publishes Moneycontrol.com.Below is the transcript of Abhishek Agarwal’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: Is there enough steam in the numbers to give a sustained rally to the stock? What are your current price targets? A: We do not think that the sustenance of this rally will be there because quite frankly, what has been seen in the recent past was because of refining margin trend which has tapered off now. We do remain positive on the stock from a longer-term perspective, because of the new projects that it is adding, but purely from a margin profile perspective, we believe that the margin profile is tapering. Singapore gross refining margins (GRM) which clocked USD 7.8 per barrel earlier are now hovering around USD 5 per barrel. We expect this to improve a little bit, to go back to USD 6.5 per barrel, but nevertheless, there is some amount of weakness in the GRM scenario here. Sonia: So, from USD 10.8 per barrel, what is the expectation for the GRM for the next two quarters? A: We expect that Reliance, because of its refining strength and flexibility, will be continuing to post GRMs of anywhere between USD 9.5-10 per barrel. Latha: What is the rerating of the stock dependent on? A: The reason why we believe the stock will rerate is because of the new projects which are going to come through. Those have of course, as you would have heard, been deferred in certain cases to the second half of this fiscal and that is where we believe that the largest chunk of growth will come through. Most of it will filter through in FY18 rather than FY17. Reliance Jio as well as the other projects on petcoke gasification, the gas cracker as well as the new polyester capacities which are coming through. Sonia: You started by saying that you do not expect Reliance to see a sustained upmove from here right and then you said that you expect the stock to rerate, so I am not getting it. A: The reason why I am saying that today softness could be there a little bit in the stock because capital expenditure (Capex) increases that are being talked about. The company guided that they are going to spend nearly USD 1 billion additional on their downstream projects as well as there was no clarity provided on when exactly the launch of Reliance Jio will take place. So, let us say today or in the very near-term, along with the weakness in GRMs, there could be some amount of softness in the stock, but over the longer term, I certainly believe that with all of these projects coming through, FY18 will definitely be a very big year for this company. We have an earnings per share (EPS) estimate of Rs 105 for next year. Sonia: So, for the longer term, what is your price target for the next 2-3 years because we have seen for the last five years Reliance has not given any returns to shareholders? And also, what is your estimate as far as the Q1 and Q2 profits are concerned. Q4 profits were at a record high of Rs 7,320 crore, what is the expectation for the next two quarters? A: For the next quarter, in terms of earnings, there will certainly be some amount of softness, because like I said, the GRM bit is something which is definitely weaker. We expect that profits could decline anywhere between 10-12 percent, but of course that will depend upon a multitude of factors. As far target price goes, we have a target price of Rs 1,280. That is based on FY18 numbers.