Volume growth big positive for Reliance Ind: Edelweiss Fin

Reliance Industries’ (RIL's) numbers outperformed analyst forecasts by 6 percent and were fundamentally strong, says Jal Irani, Oil & Gas Analyst at Edelweiss Financial Services."The stock slide today is only to do with very short-term technicals versus fundaments," he says, adding that the fundamental key driver in gross refining margins is "structural and permanent."The brokerage has increased RIL's target price to Rs 1,270 per share post the third quarter earnings. On the company's petrochemical business, he says its volumes have been extremely robust, which led them to demand higher prices too. It is the volume growth which has been a positive trigger, he adds.Below is the verbatim transcript of Jal Irani’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18.Anuj: Optically there was nothing wrong with Reliance Industries numbers but we have the stock down about 2 percent today. What is your own call after the numbers, do you think the quality of earnings was as good as the market expected or were there some issues if you looked at the overall earnings? A: I don’t believe there was anything wrong with quality of earnings. Stock prices don’t always react one-to-one and one of the reasons the stock has come off is that while the results were good and outperformed analyst forecast by 6 percent, a lot of the traders forecast had become excessive. So, I think a lot of positions had been built up prior to that also. So it is frankly to do with short-term, very short-term techncials versus fundamentals. If anything, even the quality of earnings, if other income is one gauge to go by, was even better. Even the key driver which is gross refining margins, while there is some element of near cyclical upturn there and that may give up perhaps in the next three months or so but a lot of the gross refining margin increase is actually very structural and permanent. So, I don’t believe there was anything fundamentally wrong with the results. Ekta: On that basis then what are your EPS estimates that you are working with and any change in your assumptions?A: I don’t remember the absolute EPS estimate but we have hiked our near-term numbers by 2-3 percent and similarly we have hiked our target price as well by about 4 percent. We were among the highest on the street; we are now at Rs 1,270. Anuj: What about petchem performance in particular. That is something where they managed to surprise everyone on the upside. A: The petchem volumes have been extremely robust and what happens as a result of robust volumes is you are in a better position to demand higher prices as well. So they did have a bit of a kicker for both of them. Now, petchem is of course divided into sort of polymers and polyesters, polymers demand growth was in the region of about 14 percent, polyester lagged about 6 percent. So, it is not universally good but there is a very wide spectrum of products that they make. Essentially, polymer capacities globally are not coming up that quickly and utilisation rates globally should remain strong. Also, the other structural shift there is that with oil prices going down, the Naphtha based producers, their relative advantage increases. So, the gas space producers and the Naphtha based producers, gas input prices don’t move very sharply and when oil prices go up, gas gets advantage and the reverse happens when oil declines. So, Reliance being predominantly a Naphtha based producer, also saw an increase in margins because of that as well. However, going forward more than margins, whether it is in refining or petrochemicals, especially petrochemicals, you are going to see a volume based play. So, we should not be reading too much about the margin expansion in this quarter. It is really essentially a significant volume based play going forward.Disclaimer: Reliance Industries owns Network 18 that publishes Moneycontrol.com.