Experts hail RIL GRM @ $10.4/bbl, say buy for long-term

Anuj: USD 10.4 gross refining margin (GRM), street was expecting USD 9.5. Do you think the stock has a big opening Monday morning?

Joshi: It will not, clearly because the expectation on the street was anywhere between USD 9.4-9.6. Our own expectations were close to USD 9.6. And the gasoline cracks which were expected to be higher, 32-quarter high, that is definitely come though as a very pleasant surprise, the weak rupee hitting margins. But clearly, USD 10.4, by no way of imagination would the street be expecting this. So, it has been a big victory as far as the refining business is concerned and especially the GRM which are come out. So, yes, it will be a positive opening for Reliance.

Reema: Would you go ahead and increase your earnings per share (EPS) estimates on Reliance Industries?

Joshi: Again, we need to take a call, because these GRMs are sustainable is something that we will like to ideally hear from the management and clearly, where this out beat has come from. So, if it is sustainable, in a range of USD 9.5-10, yes, the EPS numbers will change for the quarters to come.

But, in my opinion, I think that the GRM should moderate over the next two to three quarters. Probably, I think the up-take might be seen again in FY17. So, clearly, you might see consolidation from the current levels, in fact some amount of compression when it comes to GRM markets for the next two quarters. But clearly, what the management hearsay come through specifically in terms of how they are expecting GRMs to pan out, will be key for the stock going forward. So, very pertinent to know what management has to say about it.Q: First word on the numbers?

Choksey: I was expecting in a good case scenario somewhere around USD 10.1 kind of a gross refining margins (GRMs) margin and to my pleasant surprise it has even come better than that.

So certainly these numbers are backed by a very robust GRM margin that have come up and I need to get the details from the company on what kind of gasoline cracks that they have got but I do believe that the fact should be in favour of the diesel as a fuel which probably has ended up fetching up them better kind of a realization. So, certainly till the time I get more details in my hand but I believe that the GRMs have definitely lead the show as far as margins are concerned.

Q: We have to keep in mind the stock has rallied a bit from the recent lows, how much of these numbers do you think are factored in because today we saw quite a bit of decline in this stock?

Choksey: Yes, I do agree that in anticipation of the results and in anticipation of better GRMs, the stock did rally but to my mind it is all said and done, it is still quoting at 13 times price to earnings ratio on a forward earning basis. So certainly this is a company which holds lot of upside going forward. The quarterly results can probably be interpreted any which way but I do believe that given few possibilities, a) the higher amount of gasoline cracks and the margins that they are enjoying on the GRMs, b) on the petrochemical segment with the expanded capacity and with better margins coming up in this year, the company should be having better performance coming up from that side as well.

Both these areas could possibly end up producing better performance in the year going forward so I am relatively more positive about the company. Don’t know too much about the price, don’t know too much about how it would behave on a given day but the fact remains that it remains an attractive buy with the valuation in favour of investors who want to consider it for long-term.

Q: Let’s give some details on where this GRM performance is coming from, where more importantly this defining performance is coming from. So USD 10.4 per barrel compared to USD 10.1 quarter-on-quarter (Q-o-Q), the production has gone up from 16.2 to 16.6 and the gasoline cracks were significantly higher at USD 19.8 compared to USD 15.4 in Q4. So, that is the sense you get that this was mainly on account of gasoline and that is also because of US, China and most importantly India where it has gone up by 12 percent.

Choksey: You summarized it all actually. I believe that the going forward as well they have little bit favourable situation given the kind of flexibility that they have for shifting the products and with the falling crude oil prices to a greater extent I believe that the comfort is on their side . So certainly I would like to believe that the performance going forward on the GRM side will remain – I am not sure whether it would be same numbers quarter after quarter because it is a function of market but would remain largely on the higher side compared to the average GRMs.