RIL to underperform till it gets buyback nod: Edelweiss

Niraj Mansingka, associate director - research at Edelweiss Securities shared his views on oil and gas major RIL's first quarter earnings and outlook for the stock going ahead.

RIL's net profit for the June quarter fell 21% to Rs 4470 crore on dwindling margins in its refining and petrochemicals businesses.

Sales however rose 13.4% to Rs 94926 crore, YoY due to higher petchem and refining volumes.  The gross refining margin (GRM) was around USD 7.60/bbl versus USD 10.3/bbl, YoY.

The downside in the stock is supported by buyback, for which the company is likely to get government’s nod in the next two-three quarters, he added. He expects the stock to underperform till it gets approval for buyback.

Investors with a longer term horizon of one-two years can consider the stock, he suggested.

Below is the edited transcript of Mansingka’s interview with CNBC-TV18.

Q: It has been a mixed bag with refinery margins being positive and petrochemical margins a sharp negative. How are you looking at the coming quarters?

A: Refining margins didn’t outperform expectations and petrochemicals were below expectations. The last quarter had seen an extreme low demand environment especially in the month of April-May which recovered in the month of June. Right now what we know is that the demand situation is close to normal and margins have also improved since then.

So, the petrochemical margins will look upwards. On the refining side, we are positively surprised on Reliance’s capability of keep on pushing down the crude quality. This means that they have run the refinery at 17.3 million tonne and even though they had taken lower quality of crude in the refinery.

They are sweating their assets and this will continue in the next quarter as well. As far as margins are concerned, they have seen an improvement on sequential basis. So, in this quarter we are expecting improvement in petrochemical and refining to have an impact on the profitability and this positive.

Q: What do you do with the stock per se because it appears that the buyback keeps the downside supported but there it doesn’t seem to be an upside trigger for a big rally?

A: There is a downside which has been supported by buyback. One of the key reasons for the stock under performance has been the approval process by the government. We are positive that it should come in the next two-three quarters.

Reliance hopes to file the development plan for the satellite fees in the month of October. They have already hired a rig to be operational from February 2013. So, we are positive on that, but underperformance maybe there till the time the approval comes in.

For investors looking at slightly longer term horizon assuming that the government approval should come in next one-two years, the stock should start looking upwards then I think it’s a good time to look at the stock.

Q: The quarter on quarter improvement in margins whether petrochemical or refining become marginal to the stock considering that E&P is a massive division and its future is so entirely dependent on how the government will move therefore do you think the stock just meanders until that decision gets taken so it makes more sense to buy it closer to any clarity on E&P?

A: If there is clarity on E&P the stock will not be here, so that is also a situation. If you buy after the event you buy it at a higher price. The stock does factor in uncertainty that you are talking about right now. The later you buy it or closer to decision you get it at higher price.