Moneycontrol Bureau
Shares of Reliance Industries climbed as much as 2.3 percent intraday Tuesday after the petrochemical and oil major's second quarter standalone earnings beat brokerages estimates.
Net profit of the company rose 1.6 percent sequentially (up 4.6 percent year-on-year) to Rs 5,742 crore and net sales grew marginally to Rs 96,486 crore from Rs 96,351 crore during the same period. The average of the estimates of analysts polled by CNBC-TV18 had pegged net profit at Rs 5600 crore.
Consolidated profit increased 0.3 percent quarter-on-quarter to Rs 5,972 crore. "Healthy performance of retail and US shale businesses ensured consolidated net profit to be 4 percent higher than standalone," said CLSA.
The key driver of profits was petrochemical, as margin expansion coupled with new capacities of polyesters/ fibres swung EBIT by 27 percent Q-o-Q to Rs 2,403 crore with margin expanding 200 basis points to 10 percent from 8 percent.
Gross refining margins came in higher than estimates at USD 8.3 a barrel in second quarter compared to USD 8.7 a barrel in first quarter of FY15 and forecast of USD 7.7-8 a barrel.
"GRMs fell only USD 0.4/barrel Q-o-Q to USD 8.3/barrel despite Singapore complex declining by USD 1.4/barrel. Complexity helped RIL take benefit of the still-strong Arab Light-Heavy spreads of USD 4.7/barrel. Brent-Dubai spreads compressing to less than USD 1/barrrel were a key positive as RIL saved more than USD 1/barrel on crude costs, offsetting weak product cracks. Utilizations rose to 112 percent versus 108 percent in Q1FY15," Macquarie explained.
With reiterating outperform rating (target price of Rs 1,100), the brokerage believes increased competitiveness via cost-control projects in refining/petchems should accentuate the (more than) 70 percent petchem capacity expansion RIL is currently undergoing.
According to Macquarie, RIL’s downstream capex programme is the key driver of growth. Goldman Sachs (which maintains buy with a target of Rs 1,239, implying 29 percent upside) also expects RIL to benefit from increasing capex in FY15/FY16, driving earnings growth of 17 percent CAGR and CROCI expansion of 160 basis points over FY14-FY17E.
With maintaining buy, CLSA too said USD 14 billion downstream expansions should drive doubling of Reliance’s USD EBITDA over next three years after falling for three years. It believes that this may also drive a doubling in the stock price during this period.
Refining EBIT of the company increased marginally to Rs 3,788 crore from Rs 3,773 crore with margin flat at 4.1 percent during the same period while oil & gas EBIT stood at Rs 332 crore compared to Rs 487 crore in previous quarter with margin at 24 percent versus 31 percent on a sequential basis.
Overall standalone operating profit of the company jumped 9.4 percent to Rs 8,235 crore in July-September quarter from Rs 7,530 crore in April-June quarter with margin firming up 70 basis points to 8.5 percent.
The petcoke gasifiers and off gas crackers, which are on track for completion around March 2016, should drive strong EBITDA growth in six quarters, feels brokerages.
Barclays retains overweight rating on the stock with a target price of Rs 1,100. With valuations at a 12 percent discount relative to its history and at a 15-23 percent discount to global peers, the brokerage finds the risk/reward favorable.
It said seasonal margin trends in Q3 and Q4 are likely to be supportive but its overweight is predicated on a more secular doubling in earnings per share (EPS) and return on capital employed (ROCE) post FY16.
"This inflection is still a year away, in our view, but the prerequisites – downstream project start-ups, higher gas prices and clarity on the telecom business – are all likely to fall into place over the next 6-12 months," it added.
Citi believes the quality beat could help support the stock near term, especially given the 18 percent year-to-date under-performance. Next catalyst, according to the brokerage, is the expected gas price hike on November 15.
Credit Suisse maintains outperform rating, saying Reliance is a Asia ex-Japan focus list stock.
Meanwhile, retail division of the company logged its highest quarterly revenues of Rs 4,167 crore and also highest operating profit of Rs 99 crore. The company said it now has 2000 stores across 155 cities.
Retail operating profit margin jumped 180 basis points Y-o-Y to 4.5 percent led by better margins due to cost efficiencies being driven through a largely-fixed investment base.
At 14:02 hours IST, the stock was quoting at Rs 968.40, up Rs 10.55, or 1.10 percent on the BSE.
Disclosure: Reliance Industries has acquired management control of Network18, which owns TV18 Broadcast and moneycontrol.com
Discover the latest business news, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
