RIL Q1 on expected lines; target remains Rs 1100: Macquarie

Jal Irani of Macquarie says Reliance Industries has delivered Q1 numbers in-line with their expectations. In an interview to CNBC-TV18, Irani says that with KG-D6 volumes halving year-on-year, the profit of Rs 5352 crore was expected.

The profit was boosted by stronger margins in its main oil refining business and higher other income.
Irani is also retaining his target of Rs 1100 on the stock. Below is the edited transcript of Irani's interview to CNBC-TV18. Q: Some of your peers have noted that while the reported numbers were strong on other income, maybe the operating numbers were not so spectacular for Reliance Industries (RIL). Would you agree?
A: They are in-line with expectations. Essentially with KG-D6 volumes halving YoY, that is exactly what was expected. Gross Refining Margins (GRM) at USD 8.4 is actually up YoY.  Infact, in the month of July, they have nearly hit USD 10.
GRMs in the month of April and May were extremely weak, June was better and July was much stronger, so I cannot say why there is such a big difference. Regarding other income, there is an element of about Rs 900 crore of profit of other income which is not interest income.
Reliance has not provided a breakup of that, but a fair bit of that is sale of long bond government securities. One cannot consider that as extraordinary. Essentially, they sold a significant portion of their bond portfolio in the month of June before interest rates rose sharply.
In any case, if they would have held this in normal bank deposits, a bulk of those Rs 900 crore would have come in the form of interest income in any case. So, there is some element of good return, higher return than expected, but it is not essentially extraordinary.

Q: Have you had reason to tweak your price or earnings target on the stock either for the current year or forward?
A: Not at all. My target at Rs 1,100 is the highest on the street. I have indeed retained that and as far as the first quarter results are concerned, they are actually on significant track to achieve full year numbers as well.
Interestingly, what is not there in the standalone numbers is the extremely strong performance by shale gas and liquids from the US which has grown 74 percent in profits Y-o-Y. That is a performance which is way above expectations and that would come in consolidation at the end of the year and not in the standalone numbers. That already accounts for 12 percent of consolidated profits which is ahead of expectations.
Similarly, on the organised retail front they have provided the turnover growth number which is 52 or 54 percent, which is a significant acceleration on the previous year and rather importantly when one looks within the granularity of that number same-store sales have grown fairly sharply. I think it is in the region of 10-25 percent. So, these are numbers which are not visible in the standalone numbers and ensure that our full year consolidated numbers are perfectly on track. Q: What about the petrochemical division? Some people were a bit disappointed at the Earnings Before Interest and Taxes (EBIT) number for that division.
A: Petrochemicals has been a mixed bag. On polymers the margins have been quite good, but one particular small product Butadiene, margins there collapsed by two-thirds due to international trends and that weigh things down temporarily. However, it is more of a mixed bag than a disappointment, because volume growth whether it is polyester or polymers continues to grow extremely strongly between 10-15 percent which is even in excess of China in percentage growth numbers and this trend is something which has maintained now for at least six months, so that has actually really been an encouragement, but overall a mixed bag really. Q: What kind of response do you expect Indian Oil Corporation (IOC) to get its large sized offering? It has seen some interest amongst the investor community over the last couple of months.
A: IOC is the bellwether of the three Oil Marketing Companies (OMC). The stock has come off extremely sharply. It presents an incredibly good value. We do have an outperform rating on the stock. The headline PE ratio actually suggests that the market is completely ignoring the company at the moment simply because the free float is so low and the market is ignorant about the stock. IOC has also got about Rs 150 of value in from strategic investments and other businesses, if you strip that out from the current stock price, it is ridiculously cheaper. I do not know what sort of interest one may find from investors specifically, but we do believe that it presents some very deep value at the moment actually. It just depends on how aggressively it is marketed.