Market experts analyse Reliance Industries' Q1 earnings

Anuj: The one-time gain is an exceptional item of Rs 1,087 crore. Any thoughts on where that number is coming from?

Tulsian: No, I have not been able to correlate that Rs 1,087 crore and the profit is actually Rs 9,079 crore. But what is surprising to note is that the refining earnings before interest and taxes (EBIT) margin is 11.17 percent and petchem EBIT margin is 15.83 percent. And both are exceptionally well because even if taking this Rs 1,087 crore, the exceptional item, this kind of EBIT margin is really phenomenal. And one thing I wish to draw here that the interest burden has increased substantially. If you take Q4 numbers, the interest was at Rs 556 crore and in this quarter, the interest liability has increased to Rs 1,190 crore.

And apart from that the tax liability has come to 20 percent maybe because of some depreciation benefits which must have been calculated from Reliance Jio must have been booked by the company though the financial performance of Reliance Jio may not have been incorporated here. So the tax benefit and the increased interest burden partly must have come here because that is what I have said that interest liability for this quarter is Rs 1,190 crore. And the tax liability has fell to about 20 percent which was at 23 percent for whole of FY17.

So these are few but exceptionally, extraordinary EBIT margin of 15.83 percent for petchem and 11.17 percent for refinery because if you see the refining EBIT margin, I do not think that in this recent past, maybe 6-8 quarters, you have seen this EBIT margin going into the double digit. Maybe even if I presume that crude throughput is seen maybe at about 17.7 million metric tonne or maybe 17.8 and capacity utilisation at 120 percent, then also, this is phenomenal.

Anuj: Your thoughts on the numbers? Now look, these numbers are way above estimates. We have to put it the way it is, the net profit number of Rs 9,100 crore versus poll of Rs 8,000 crore and refining number is huge.

Diwan: Absolutely. This whole big question whether Reliance can maintain momentum and there was, for the first time after 12 quarters that people thought there could be a blip, it does not seem to me. And I will tell you, one of the challenges this quarter which they have managed to overcome again so well and distinctly is that the distinction between heavy and sweet crude had narrowed down to just about 14 percent and if that were to go by, it would have been really difficult to maintain margins, but there is some throughput increase that has distinctly happened.

So even if the margins and I will not be surprised if the margins are not USD 11 or more, significantly higher than last quarter, but the throughput has probably brought the EBITDA to be so healthy. Petchem, of course, was expected, great volumes growth, pricing had come back, but the refining is what we will need to decipher what is behind this. But remarkable. There is absolutely no letting down on the momentum.

Anuj: The GRM number has come in as USD 11.9 per barrel.

Diwan: I think phenomenal. It is not just an ordinary surprise which you could have glossed over. This is intriguingly surprising because USD 11.9 and that too in an environment, as I said, where it was expected that there would be pressure on the GRM because of the differential between sweet and heavy crude. And mind you, Reliance has had this ability to do two things remarkably, distinctly well. One is the quality of crude that they can actually bring into the refinery and the throughput that they can generate, it is phenomenally, the margins that they can make is much better than any other global refineries as well.

Secondly, their inventory management has been up to the mark all the time. They have managed the volatility in crude which has of course, been on a softer side this time. And this time, what I would believe and once I get the details on these numbers, what is contributing to the refining the positive side on refining side again is the capacity utilisation. Where do you get, on a scale like this, 120 percent and 118 percent? So as Mr Tulsian said, those things are where they have distinctly set themselves apart, set the bar higher. So absolutely surprisingly positive.

Anuj: Refining EBIT of Rs 7,476 crore. We were working with around Rs 6,150 crore. There is a one-time gain as well of Rs 1,087 crore. So we will work out on that as well. Your thoughts on the numbers?

Anand: Prima Facie number looks to be very good. Even we were factoring a petchem EBIT of Rs 38 billion while they have given roughly about Rs 41 billion and even refinery side, we had expected about Rs 60 billion. So even if we are suppose Rs 1,000 crore from Rs 7,400 crore, which comes to around Rs 6,300 crore odd, which is still above our expectations. So there should be some beat on your gross refining margin (GRM). We were expecting USD 11 so we still need to get the GRM number but number looks to be very good.

Anuj: Your thoughts on where the stock could move from here? It has rallied a lot, let us not forget that.

Anand: Yes, but the company has given a very good set of numbers. In fact if you look at the standalone numbers, your EBITDA is around 113 billion against our expectation of 112 billion and the net profit is around 82 billion against our expectation of 81 billion. So it has given a positive surprise and we have maintained our buy rating on the stock and we continue to have a positive view on the stock.

Anuj: You have seen the initial numbers, the GRM of USD 11.9 and both refining and petchem, prima facie look higher than estimates.

Jain: Definitely, these numbers are substantially higher than what we were expecting. In fact I was on much lower side in terms of GRM. I was focused on around USD 10.5 per barrel and sequential jump in GRM, no one would have thought about a sequential jump in GRM for Reliance in this quarter. They have delivered exceptional strong numbers. Both and in fact, if you look at the EBIT margins of the petrochemicals segment, they are highest in possibly FY09 or sometime thereabout, they had hit that 16 percent mark. So it is a phenomenal performance in this quarter operationally.

Anuj: How would you approach the stock?

Jain: In fact Reliance was a part of our top picks and if we were to retain that, we earlier had a target of Rs 1,650 possibly we might evaluate the target as well because an environment where the things are not conducive they have delivered USD 11.9 per barrel GRM and now things are likely to improve with petcoke gasifiers commencing operations and the petchem projects commencing operations. So all those things actually can lead to a more price to the forecast that is there on the street. Possibly more upsides from Reliance can be seen from here on.

Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.