Analysts remain cautious on Reliance Industries

Our Bureau Chennai | Updated on November 11, 2019


Falling refinery margin, uncertainties cloud outlook

The stock of Reliance has been moving in a range for more than a year. The stock tumbled 3.7 per cent or Rs 30 to Rs 779.20 on Thursday. The 52-week range for the stock is Rs 1,090-713.55.

Analysts are maintaining a cautious stance on the stock due to refining margin concerns and also lower production besides lingering uncertainties with the Government over production sharing contracts. Though most maintained buy recommendations, they have reduced price targets for the stock.

However, some brokerages are of the opinion that the weakening of rupee will offset the margin concerns.

In the last one-year, the stock under-performed the BSE Sensex; while it crashed 24 per cent, the Sensex fell 16.3 per cent.

Bank of America-Merrill Lynch says: “We had concerns that refining margin (GRM) would weaken if demand weakness coincides with large refining capacity addition in 2012 (Reliance Industries Ltd, August 22, 2011). In November, Reuters' Singapore GRM had collapsed. We have cut Asian GRM (Oil Industry, December 2011) and FY12-14 GRM of Reliance Industries by 6-11 per cent to $8-9/bbl. This has led to cut of 4-9 per cent in FY12-14 EPS and 9 per cent in price outlook to Rs 860.”

“We would turn more bearish on RIL if its FY13 GRM is lower (if oil demand weaker) than assumed by us and/or rupee is stronger (Rs 50 assumed). We would turn bullish if GRM are higher (higher than expected refinery closure), RIL makes significant oil or gas discovery and/or a value accretive acquisition,” added BofA-ML report.

Edelweiss Securities says: “We have also incorporated lower gas output to account for a faster fall in production and estimate output at 44/39 mmscmd in FY12/13.

However, rupee depreciation should help, with FY-13 Earnings Per Share going up by 1.5 per cent for a one per cent fall in the rupee.”

Another dampener is concern over Government action against the company on lower production.

The Oil and Gas Ministry has been contemplating action against the company for bringing down output from Dhirubhai-1 and 3 gas fields in the KG-D6 block, to about 34 million cubic meters per day compared to 61.88 mmcmd target, by limiting the amount of expenditure it is allowed to recoup. Reliance Industries had slapped an arbitration notice on the Government against its move to limit the cost the company can recoup.

“Currently, there is no mechanism in the production sharing contract (PSC) for disallowing investments. Besides, any change in production sharing contract has to go to Parliament as the contract is between the Government and the operator. The PSC does not make explicit reference to capacity utilisation as a determinant of cost recovery. Additionally, with projects such as deepwater gas production that require continuous flow, it is standard industry practice to build redundancy into critical equipment. Therefore, we believe arbitration proceedings might actually favour RIL and help bring the issue to an early resolution,” said a note from KR Choksey.

Published on December 08, 2011

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