Reliance Industries Ltd’s (RIL) investors have a surfeit of good things going on recently. First, the company announced in February that it will start charging its telecom subscribers from this financial year. The RIL stock has gone up as much as 30% since then. Second, the company gave updates on the status of its downstream expansion projects in the past week. Thirdly, and speaking of numbers because it helps validate the stock performance to some extent, it beat the Street on gross refining margin (GRM) expectations for the March quarter.
The company eked out a handsome GRM of $11.5 a barrel last quarter. That translates into a premium of $5.2 a barrel over benchmark Singapore GRM, the best in the last eight quarters at least. Independent analyst S.P. Tulsian feels RIL’s GRM got a big boost on account of better procurement of crude oil. “This (the GRM) is a great number," he said. Kotak Institutional Equities, Jefferies India Pvt. Ltd and Nomura Research were expecting the measure to be $10.4/barrel, $11.2/barrel and $11/barrel, respectively. The refining business accounted for 64% of RIL’s total standalone earnings before interest and tax (Ebit).
GRM is the realization from turning every barrel of crude oil into finished products and is an important measure of profitability for refining firms.
RIL’s petrochemicals business, contributing 35% of RIL’s Ebit, delivered a decent performance as well. While higher product prices helped revenue performance, lower volumes partially offset it. The oil and gas business continues to be a drag, though Ebit losses have declined year-on-year and sequentially as well. The continuing weak price environment in the domestic market and declining production trend impacted the segment’s revenues. However, that’s hardly a worry given that the business is small in the overall scheme of things for RIL.
The outcome: RIL’s standalone pre-tax profit increased 4.6%, far slower than 34% revenue growth and 9% operating profit growth. Pre-tax profit growth was impacted on account of a decline in other income and high depreciation costs. RIL’s standalone profit after tax at Rs8,151 crore is broadly in line with analysts’ expectations.
Having said that, better March quarter refining margins may well bring cheer for investors. Moreover, telecom subscribers at 108.9 million as on 31 March look healthy. Telecom subscribers will start contributing to revenues this year, said Tulsian, adding, “Though I don’t believe that telecom business will add to profit before tax in FY18, but such a big subscriber base will add to positive sentiment for the stock."
Further, analysts have been gung-ho on RIL’s recent downstream updates. In a report on 21 April, Vikash Kumar Jain at broking firm CLSA said that RIL has announced that all its important downstream expansion projects (including Para-xylene expansion, refinery off-gas cracker and even petcoke gasification) are broadly on schedule. “With the project update already provided, (1) an announcement on paid subscribers and (2) an update on capex guidance for Jio are the two remaining focus points for us in the analyst meet on Monday after Reliance’s result," pointed out Jain. Needless to say, the stock is likely to take cues from upbeat commentary from the management on the telecom business at the analysts’ meet held Monday evening.
But rising debt is a thing to watch out for. “One of the bigger worries for the stock is its rising consolidated net debt, which stood at about Rs1,20,000 crore, at the end of financial year 2017," says Tulsian.
One RIL share currently trades at about 15 times estimated earnings per share for the current financial year, based on Bloomberg data. The sharp recent appreciation could well mean that upsides for the stock will be limited in the near future.