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Mumbai: The earnings of India’s most valuable company, Reliance Industries Ltd (RIL), will likely remain weak over the next two fiscal years, but will gain momentum after that, brokerage firms’ analysts said in research reports written after meeting the company’s management.

Mint has reviewed research reports of 29 domestic and foreign brokerages firms released since 21 April.

RIL’s management met the analysts tracking the company on 20 April after announcing its earnings for the three months and fiscal year ended 31 March. The company outlined the challenges it is facing in ramping up gas output from the D6 block in the Krishna-Godavari basin, and how it will deploy the excess cash on its books.

Details of the proposed plan to increase gas output, along with a reaffirmation of previously announced investment plans in the petrochemicals and refining businesses being on track, led to analysts expressing optimism about RIL’s long-term prospects despite short-term headwinds.

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Mint’s AveekDatta says several brokerages expect Reliance Industries to have muted earnings for the next couple of years, but see a revival after that

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The RIL stock lost 0.45% on BSE on Friday to close at R742.10 on a day the exchange’s benchmark equity index, the Sensex, gained 0.02% to close at 17,134.25 points.

Since it announced its earnings on 20 April, RIL’s stock price has gained 1.46%, while the Sensex has lost 1.38%.

“As a back-of-the-envelope estimate, RIL Ebitda can increase around $5 billion (around R26,350 crore today) over the next five years as a result of E&P (exploration and production), petchem expansion," the Credit Suisse report said. “If US gas prices recover by then, the shale gas business can potentially add more than $1 billion in Ebitda as well."

Ebitda, which is short for earnings before interest, tax, depreciation and amortization, is a measure of operating profitability.

CLSA Asia-Pacific Markets expects the oil-to-yarn and retail conglomerate’s net profit to revive in FY15 on “higher gas prices and a rebound in E&P production, as well as the ramp-up in petchem projects".

Standard Chartered Bank and Enam Securities Pvt. Ltd expect earnings to improve starting in FY14.

Till then, “near-term earnings would remain subdued due to falling gas production and weak cyclical margins", wrote analysts Amit Mishra and Prashant Tarwadi of Enam Securities.

During the analyst meeting, RIL spoke of the integrated development plan that it is working on with its partner in the oil and gas business, London-based BP Plc. This is expected to be submitted to the government by October, analysts Sanjay Mookim and Badrinath Srinivasan of Credit Suisse said.

Satellite fields

The integrated plan seeks to simultaneously develop the satellite fields in the D6 block and five new discoveries. This approach could add more than 25 million standard cu. m per day (mscmd) of gas production.

D6 gas production had slumped to 34.6 mscmd at the end of the March quarter, whereas it should have reached around 80 mscmd by now.

The RIL management told analysts it had restated proven gas reserves from D6 downwards by 12-15%, to factor in lower output and the transfer of a 30% stake in the field as a part of the sale of 21 oil and gas blocks to BP.

Credit Suisse expects RIL to take three-five years to start producing gas as per the integrated field development plan, and output could cross 70 mscmd by 2015-16.

Analysts said that RIL’s future earnings will also receive a fillip if the government were to accede to the company’s demand for higher gas prices, which is also crucial for it to undertake further capital expenditure.

“The gas price issue remains contentious and (the) management reiterated its keenness on an immediate resolution to their demand for market-linked gas price (even for existing production) before potentially committing any major capex," Citigroup Global Markets Inc.) analysts Saurabh Handa, Graham Cunningham and Abhishek Sahoo said.

RIL’s D6 gas currently fetches a price of $4.2 per million British thermal units (mmBtu).

If RIL could get a price of $6 per mmBtu for output from each of its gas fields instead, Ebitda from the E&P business could be $2 billion higher than in FY12.

The oil and gas business delivered an operating profit of R5,250 crore in FY12.

Shale gas assets

Although RIL’s shale gas assets in the US, acquired in 2010, yielded an operating profit of $250 million and net profit of $30 million, “low gas prices in US are acting as a deterrent to its shale gas investment program", a report by Ambit Capital Pvt. Ltd analyst Dayanand Mittal said.

“The company believes that CY12 (calendar year 2012) capex plan for three shale gas ventures in the US will be lower than CY11 capex plan, and the well drilling plan would continue to be more targeted towards liquid-rich resources instead of gas-rich resources."

The Mukesh Ambani-led conglomerate also said plans to invest $12 billion were on track, according to the research reports. Out of this, $3 billion has been allocated for polyester capacity expansion, $5 billion will be used to set up a refinery off-gas cracker, and $4 billion is to be invested for a petcoke gasification plant that will help convert petcoke to synthetic gas.

A refinery off-gas cracker is a petrochemical unit that will use the gas generated as a byproduct of RIL’s refining operations. A petcoke gasification plant is a unit that will convert petcoke to synthetic gas that can be used as fuel for its refining operations.

Apart from increasing revenue for the company through capacity expansion, initiatives such as the petcoke gasification plant will also aid RIL’s margins since it is expected to be a substitute for expensive imported gas that the company’s refinery in Jamnagar uses as fuel at present. This is expected to boost refining margins—the difference between the cost of processing crude and the value of petroleum products sold—by $3 per barrel, the Ambit report said.

While the polyester chain expansion is expected to be completed by CY13, the balance capex will be incurred over three-four years.

New capex cycle

The capital expenditure plan appears to have allayed the concerns of some analysts about how the surplus cash of 70,252 crore sitting on RIL’s books can be gainfully deployed. Credit Suisse called the period beginning FY13 a “new capex cycle" for RIL.

“We estimate RIL to spend in excess of $20 billion in capex through FY15 across core businesses, shale gas, telecom and retail," a report by analysts Niraj Mansingka and Kiran Tulsi of Edelweiss Services Ltd said. “We estimate it to generate $20 billion in operating cash flow in this period, and should be sufficient to match the capex."

Some brokerage firms said there is room for more investment. “Our calculations suggest that Reliance can afford a much larger execution footprint by taking organic or inorganic growth opportunities of $25-30 billion without stressing the balance sheet," CLSA analyst Somshankar Sinha said.

What would also help RIL is that it appears to have pared losses in its retail business. A Bank of America-Merrill Lynch report by Vidyadhar Ginde and Akash Gupta pointed out that the operating loss of RIL’s “other subsidiaries" came down to 165 crore in 2012 from 490 crore in the preceding year. “This suggests loss from organized retail declined in FY12," the report said.

aveek.d@livemint.com

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