RIL Q3 above expectations; target at Rs 1,027/sh: IIFL

Q: How have you read the numbers of Reliance Industries? Will the market be excited by the news or at least talk that gas output may increase as early as the first quarter of FY15?

A: The numbers were better than expectations on a couple of counts – (1) exploration and production (E&P) side business, which did well (2) the refining - the earnings before interest & tax (EBIT) margins were slightly better than expectations. While gross refinery margins (GRMs) came in at 7.6 percent versus their expectations of  7.5 percent and and (3) the other income was higher than expectations.

So, these three led to an outperformance and definitely the stock should react positively today given the fact that gas production – what they are talking about is 15 mmscmd from the current levels of 12 mmscmd. That they are talking about nearly 25 percent jump in production from Q1 onwards. So, that is a positive sign and definitely the stock should react positively to that.

Q: What about the petrochemical EBIT. That was weak this time, down 15 percent Quarter-on-Quarter. Would that hinder the stock movement?

A: One of the key reasons why the petrochemical profitability and even the revenue for that matter came in below expectations was the fact that they had taken a shutdown. In fact most of the analysts including me, were expecting the production to go up on a sequential basis given that their new polyester capacity had commenced operations but because of this shutdown they had seen volumes falling, and so did the revenues and margins. However, that should correct going ahead.

Also there is some weakness seen on the domestic demand side but with economic recovery likely to be seen in FY15-FY16 onwards, the demand should review and so should the margins going ahead.

Q: Would you expect the market in general to trade Reliance in a slightly higher band. What would that band be, what is your own price target?

A: One of the key reasons why Reliance underperformed broader market was the earnings growth. In the last three years including FY14, Reliance has delivered an average growth - of around 5 percent or 6 percent kind of earnings growth, but now we are expecting 20 percent kind of earnings compound annual growth rate (CAGR) over the next three years including FY16. If you add FY17 where their pet coke gasification and their off-gas cracker commence operations, the earnings CAGR is even higher.

So, with that kind of earning CAGR, the stock should start trading in its historical multiples of 12-14X range. So, given that the stock is definitely headed for upside and we have a buy rating with a target price of Rs 1,027 on the stock.

Q: Let us talk about other topic – the subsidised liquefied petroleum gas (LPG) cylinder quota will not be increased to 12 per year. What would your reaction be and how would you approach stocks like Indian Oil Corporation (IOC) etc?

A: First when they raised to six from nine, was a cause of concern but from 9 to 12, I doubt how much impact that would have on the subsidies because there are very few households which consume over 9 cylinders and people will not consume for the sake of consuming because it is available at a cheaper price.

So, according to me that should not cause a big flutter in these stocks but the sentiment is definitely negative given this kind of news. So the stocks could head downwards in today’s trading session. Indian Oil Corporation, Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL). However, from investment perspective, BPCL is the top pick.