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Last Updated : Jan 17, 2017 09:39 AM IST | Source: CNBC-TV18

RIL may correct but not substantially, say experts

SP Tulsian of expects the stock to correct to about 2-3 percentage points in the next couple of days but does not expect it to fall substantially.

Reliance Industries today reported a boost in other income that grew sharply by 32.7 percent quarter-on-quarter to Rs 3,025 crore despite higher finance costs.

The profit on standalone basis increased 4.1 percent sequentially to Rs 8,022 crore in the quarter ended December 2016.

However, according to market experts the gross refining margins were a big disappointment as compared to estimates.

The gross refining margin (GRM) during the quarter increased to USD 10.80 a barrel from USD 10.1 a barrel in previous quarter. Analysts polled by CNBC-TV18 expected the GRM for the quarter to be at USD 11.5 a barrel against USD 10.1 a barrel in previous quarter.

SP Tulsian of expects the stock to correct to about 2-3 percentage points in the next couple of days but does not expect it to fall substantially. "I will not say that it will take a nose dive, but it will be underperformer, maybe it will correct by a couple of percentage points in the next couple of days, "says Tulsian.

Prakash Diwan of is of the belief that the Street could be disappointed for a couple of days but it is unlikely that the stock will lose its momentum going forward. In due course of time it will see interest by new institutional investors and does not expect the miss to continue in Q4.

Independent market expert Ambareesh Baliga, too, agrees the numbers could be negative for the stock in the short-term and it could correct by Rs 25-30 but would not nosedive. However, since most buyers would be looking at 2019,  by then most of the company business would be firing on all cylinders and the stock could move up to Rs 1400.

All experts agree that gross refining margins were a big disappointment and it is unlikely that better than expected other income numbers would compensate that.
The improvement seen on the petrochemical side was good especially since quarter and quarter they have been down. However, they were only slightly better than estimates.

Below is the transcript of SP Tulsian, Prakash Diwan and Ambareesh Baliga’s interview to Anuj Singhal on CNBC-TV18.

Q: Prima facie looks like refining is a disappointment though again, they have surprised on the petchem side. Your first thoughts?

Diwan: To be honest, the improvement in the petchem is a surprise though it might not, on a Q-o-Q basis be spectacularly higher. But the pressure on input costs was expected to weigh it down and that has not really happened. But I am still not able to fathom the disappointment in the refining numbers even in some inventory gain which potentially we were factoring in. So, one is of course, gross refining margins itself being lower than expectation which is fine. So, very clearly, the mainstream business is where the disappointment seems to be there and that has got probably compensated with this hue rise in other income which is almost like 40 percent, which is not something that talks about operational efficiency.

And mind you, the only saving grace could be that Q-o-Q, for the last many quarters we have seen Reliance spring up surprises in terms of the margins, one and the volume growth, both. This time, there seems to be a disappointment in the volume growth as well as refining margins. So it is probably taking a pause. However, the stock has portrayed something else or reflected some other indications in the December month. So, it is the institutional interest that is coming bacl assuming that the bottoming out of these margins also, probably would have happened in this quarter. But otherwise, petchem is just probably the saving grace, otherwise nothing very spectacular.

Q: Your first thoughts?

Baliga: Clearly it is disappointing to a certain extent because finally, Reliance is driven by the refining business where the numbers were lower than expected. Petchem although surprised on the positive side, but it normally only provides a tailwind if the refining business is doing well. And at the same time, the other income, I do not think it is really going to cheer markets. So overall, it is some sort of a disappointment and especially, when you have seen the stock move up quite sharply in the last 2-2.5 months, it is time to be a bit cautious looking at the results.

Q: The stock had moved up almost to a 52-week high. It was down about 1.5 percent today, but do you get a sense that we are in for a bit of a knock tomorrow morning because clearly the operational number on refining, you will have to say it is a big miss.

Tulsian: Let me first clarify on the other income. I am just giving on the consolidated basis, Rs 1,215 crore against Rs 632 crore. That means they must have booked the huge income on the mutual funds because that gets booked that is why you have the lower interest income by about Rs 250 crore and you are seeing a Rs 600 crore increase. Probably they may have invested a huge amount in the debt instruments because if you see, they had the cash and cash equivalent of Rs 82,500 crore. So, that will not be going well with the market because that is what in fact I was saying day before also that I will be very careful in seeing these three items interest income, interest expenses and other income.

So, definitely if the gross refining margins (GRM) is at USD 10.80 per barrel, if you see USD 10.10 per barrel was in the preceding quarter. You have seen an increase of about USD 1.6 on the Singapore benchmark. You add another 30 cents for the inventory gain because if you had an increase of USD 4 during the quarter, if I take one week’s inventory, because they had an inventory of Rs 51,624 crore on September 30. So, even if take 30 cents pro rata of one week spread over entire quarter, they should have enjoyed an extra GRM USD 1.9. But they have just shown an increase of USD 0.7, that is 70 cents. That is going to be seen a big disappointment and again the treasury income of about this extra Rs 600 is also going to be disappointed for the market.

Now, coming on the interest expenses specifically of Rs 1,200 crore. If you see in the petchem, because they have been carrying out huge capacity addition in petchem and if you see the assets having given by them, they had assets of Rs 99,625 crore on September 30. On December 31, they are Rs 1,04,393 crore. That means, there has just been addition of Rs 5,000 crore. I am not seeing any additional amount having capitalised on the fixed assets account. So, I do not know that how come this interest expenses have risen by Rs 300-350 crore because whatever capital expenditure has been carried out, that has been carried out in the telecom segment. And they have not touched anything. Nothing has been booked and neither the income nor the expenses because telecom obviously does not have any income, so they have not booked the interest also on account of the telecom.

So, the big outlier or the further allocation of Rs 30,000 crore to telecom, no clear roadmap seen or blueprint seen on the telecom business. The big disappointment from the refinery segment will disappoint the market and I will not be disappointed to see the share correcting. I will not say that it will take a nose dive, but it will be underperformer, maybe it will correct by a couple of percentage or may be 2-3 percent in the next couple of days.

Q: We have the throughput numbers now, you want to make any more comments on that?

Tulsian: Actually, the throughput number is 17.8 million tonnes and I have estimated it to be at 17.5 million tonnes. That means in spite of having the higher throughput, there is a disappointment. But, on the petchem front, as I said, a while back, that I am expecting it to be a about 6.3 million tonnes, but it has come at 6.2 million tonnes. So, in spite of a slightly lower on petchem, they have shown a better performance. But on refinery front, there is a big disappointment because in spite of a 0.3 increase in the throughput, the refining margin is seen to be so low at 10.8. And again, the kind of estimations which we have given, we have given Singapore benchmark at 6.7, the same has been confirmed by the company against 5.1. So, as I said a while back that there has been an increase of 1.6 in the Singapore benchmark, even that has not been enjoyed by the company apart from the inventory gain. So, on the refinery front, there is a big disappointment seen.

If you see on the Capex front, which I have been referring, Rs 37,791 crore is the Capex which they have done in Q3, but major portion of that has been done on the telecom which is not impacting the profit and loss. So, this increase in the interest expenses and again press release has confirmed that the higher other income is because of the investments of the mutual funds which I have been referring. And because of that the interest income is lower and the other income is higher. So, these are the few gist of the press releases which the company has released just now.

Q: What is the overall verdict because petchem obviously is smaller than refining and refining is the big business? For the last 3-4 quarters, refining was doing remarkably better. Every quarter, they were somehow coming out with GRM number which we thought where is that coming from. So, what is the overall verdict?

Baliga: Overall verdict, if we are talking of short-term, yes, the stock could correct. I do not think it will take a huge knock, but it could correct to a certain extent because it has moved up in the past month and half, two months. But then again, those who are buying now are possibly looking at 2019, not even 2018. They are looking at 2019. That is the time you will have most of the businesses actually firing from all cylinders including Jio, at that point of time. And right now, you could see levels, it could come down by about Rs 25-30, Rs 40. I really do not see it going much below that. But then, if one is looking at the next 1.5-2 years, one should be looking at levels of Rs 1,400 plus.

Q: In the past sometimes the numbers have looked good and the stock has done nothing. But this time, the numbers do look bad, but at what price would it be a buy for you considering that we have already had a decent bit of rally in the stock.

Diwan: Given, once we are able to attribute the cause behind this without throughput coming down just a margin impact and as I said, I would look at it from a positive standpoint that maybe it would starting with the Singapore refining margins in this current quarter. Maybe the company has probably chosen a product mix which is more aligned towards light diesel oil (LDO) and gasoline which are not very high margin in any case, given the kind of turbulence in the global markets. What is interesting is that at Rs 1,000 Reliance again would start attracting a newer set of investors because there is still a lot to catch up from its hay-days in terms of institutional holdings, that is one.

Second is that going forward, as we are expecting that the telecom business which is a very capital intensive element and that is going to be a decider of sorts after a couple of years will need to be funded through some quasi equity route and not debt because we are seeing the interest cost burden already impact this balance sheet in a significant way. You have seen that interest expenses going up so significantly. If there is no curbing that, we still expect Jio to go around expanding in its Capex programme, it will have to get funded in some sort of way which is not dilutive. So, if that happens, probably that will take away a little bit of the negativity and the stock could probably consolidate at these Rs 1,000 levels.

(Disclosure: Network 18, which publishes, is a part of the Reliance Group.)

For the full discussion, watch video

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First Published on Jan 16, 2017 06:16 pm
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