Reliance Q2 nos positive; buy with Rs 1206 target: Quant

Latha: Certainly a minor positive from the margins s well as from the bottomline on Reliance Industries numbers. What did you like about it?

A: I like the improvement in petrochemical business. Their EBIT has shown the robust growth of around 28 percent quarter-on-quarter (QoQ) and that is primarily driven by the weakening in the naphtha prices and I believe that if current weak crude prices environment remains then their benefit will remain because I don’t see any decline in the demand of the petrochemical side. So, subsequently the prices of petrochemical segment would remain at current levels.

Sonia: The petrochemical business was quite encouraging but the exploration and production (E&P) segment was lacklustre this time around, would that worry you and what do you think could be the trend going ahead?

A: In terms of domestic E&P, yes, it is a well-known thing that there is a maximum KGD6 production, the marginal decline so that is in line with whatever the expectation was.

Other than that in the Panna-Mukta-Tapti field, where Tapti field is rapidly declining and they are planning to relinquish it in next one year. So this is not something very disappointing. Yes, in terms of US, they have witnessed in this quarter around 1.2 billion cubit feet per day of production around this quarter, which is around 38 percent year-on-year (YoY) growth, this is despite the weak US gas prices below USD 4. That is the good thing that we observed and I expect that if in next two years when US starts exporting LNG then there is an expectation of revival in the gas prices that will further improve the earnings from the US in terms of E&P for Reliance.

Latha: What else are you factoring in from what the company said after the numbers? They spoke about their capex plans, their first half and their intended capex plans as well, what are you factoring in by way of FY16 earnings or FY17 earnings from telecom, from retail, from shale?

A: Telecom - it is a slightly longer time. Yes, we expect that around Rs 10,000 crore further they expect in next one year. So overall their target is at least Rs 60,000 crore where they have already done around Rs 45,000 crore.

Other than that, we expect that this US shale business will grow at around 20-30 percent on Y-o-Y basis going forward and additionally I expect that they will witness the benefit of the petrochemical expansion project that has already started commissioning and in definite modules and by one to one and a half year, it mostly will be commissioned. Then they will get the benefit of the doubling of the petrochemical business capacity.

Other than that we have the advantage on this margin expansion because of weakening naphtha prices. Overall, I expect that around 80 percent growth in the petrochemical EBITDA they expect in next two years. So that is overall expectation and other than that, this petcoke to gas project - I expect that benefit would also flow after two years that will improve their refining margins by around one and a half to two dollars - that would be around 25 percent of the present gross refining margins (GRMs).Sonia: What is your recommendation now on the stock, how is it looking on a valuation parameter?

A: I recommend a buy on Reliance and my target price for March 2016 is Rs 1206. I find it cheaper in terms of valuation as it gets minimal value for the expansion of the petrochemical projects. Also this ramp up in the US gas production and additional the retail business is growing at more than 100 percent rate so that still needs to be factored in the valuation, that will unlock the value of Reliance in next one and half years that is my expectation.