RIL stock has 15% upside post Q1: IIFL

After Reliance Industries beat street expectations for the first quarter of this fiscal, Prayesh Jain of IIFL said that more upside is expected in the stock post earnings and said its gross refining margins (GRMs) are likely to stay strong going forward.

In an interview with CNBC-TV18, he said that operational performance of the refining segment was much better and refining and petrochemical units could see better times ahead.

He has a buy rating on the stock with a target price of Rs 1200 per share over the next 12 months, about 15 percent higher from current levels.Below is the verbatim transcript of Prayesh Jain’s interview to Sonia Shenoy & Latha Venkatesh on CNBC-TV18. Latha: The results were clearly better than our poll and the gross refining margin (GRM) numbers were quite a stunner. Is there more juice left in the stock? A: Definitely, there is a lot of juice left in the stock and the numbers were quite better than what we were expecting. In fact when you spoke about the GRM number it came in at USD 11.5 vis-à-vis our estimate of USD 9.3 and one of the reasons was the fact that inventory gains were there and also the hedging benefits were there which were there to the quantum of around USD 2 per barrel. However even after adjusting for that they were better than what we were expecting because we also had built in some inventory gains. So, net-net the operational performance of the refining segment was definitely better. Talking about petchem as well they delivered much better earnings before interest, taxes (EBIT) margins than what we were expecting and spreads have spent in across the chain for Reliance Industries. Now with this backdrop the refinery off gas cracker commence in operation from the end of Q2 and pet coke gasification starting by the end of this year both these segments can only see better times ahead while the fundamentals for these have also been improving with incremental demand expecting to be around 1.3 million barrels per day for the petroleum products while the capacity addition is expected to be 0.7 or 0.8 million barrels per day on the refining side. So, the GRMs are likely to stay strong and even for petchem spreads with China doing well US economic recovery all these factors favour the spreads to improve going ahead and Reliance is only going to outperform on these two segments. The Jio should also launch in some time with the physical infrastructure in place and the entire ecosystem is in place and ready for launch. But they are looking for some more test results before they do the commercial launch. That should also be behind us in the next one or two quarters. So, it is all positive for Reliance from here on and we have maintained our buy recommendation with target price of Rs 1,200.Sonia: And what is the timeframe that you are looking at? Is it 12 months? A: One year. Sonia: And what is your expectation as far as GRMs are concerned. Already sitting at record highs of USD 11.5 a barrel. Going forward over the next couple of quarters what are you forecasting? A: Some of the gains that were seen in Q1 that were seen could actually reverse. You might see GRMs slightly weakening in Q2, but then Q3-Q4 onwards we think GRMs could sustain at these levels. Sonia: I wanted to ask you about the additional royalty that some of these upstream companies may now have to pay, the likes of Oil India, ONGC. How did you read into that news flow and what do you think the impact could be because the government has made some clarifications now on higher royalty that these companies would have to pay? A: That is just an incremental burden on these companies and the cess thing has already burdened these companies and the incremental royalties also put pressure. Slowly and steadily we were building that these companies are getting better times with subsidy burden getting erased but these kind of ambiguities keep coming in and put pressure on the other side. So, these are not great moves for the upstream companies. Latha: Do you track Oil India itself? There the impact is expected to be slightly more than ONGC? A: Yes, we do track Oil India and we have liked that stock for a pretty long period of time but these kind of news flows keep us on the sidelines for these companies and the impact would definitely be slightly more for Oil India. Disclosure: Reliance Industries, which owns Reliance Jio, also owns Network18, which publishes Moneycontrol.com.