Reliance Industries' Q2 FY09 net profit was up 7.4% at Rs 4,122 crore as compared to Rs 3,837 crore. Net sales were up 39.8% or Rs 44,787 crore as against Rs 32,043 crore. Gross refining margins stood at USD 13.4 per barrel vs USD 15.4 per barrel QoQ. So, what do experts read into these numbers?
SP Tulsian of sptulsian.com feels Reliance Industries has done better than expected. "The market had estimated a bottomline of Rs 4,000 crore and RIL surpassed that with a profit of Rs 4,122 crore."
He sees a technical bounceback in the RIL stock to about Rs 1,300. "In FY10, with the contribution that would come in from Reliance Petroleum's refinery and KG basin, current price trend of crude oil, GRM, and the gas pricing having settled by the government, the company should have an EPS of anywhere between Rs 175-180 for the full year."
Jigar Shah, Senior Vice-President and Head of Research, Kimeng Sec India, said RIL has done quite well. "The overall result was extraordinary given the situation of volatility, and petrochemical and petroleum prices. The results should have a positive impact on investors. I see a 50-60% appreciation in the stock value in one year."
According to Shah, RIL's interest cost is going up because their capital expenditure continues. "I don't think they are slowing down, while the overall growth rate in the economy for investment is coming down. That indicates a strength and confidence for the following quarters."
Here is a verbatim transcript of the exclusive interview with SP Tulsian and Jigar Shah on CNBC-TV18. Also watch the accompanying video.
Q: Would you say they have done better than expected them to do?
Tulsian: Reliance Industries has done better than expected because I am not too surprised about the company's topline because one can always have that kind of turnover depending on the kinds of contract they have. The bottomline of Rs 4,122 crore translates into an EPS of close to Rs 28.50. I do not think the analysts estimated a bottomline of more than Rs 4,000 crore because of the huge margin pressures and because of the currency fluctuations and the rupee weakening by more than 9.5% in the quarter. This is definitely very positive on the bottomline at least.
Q: Analysts were expecting more like a USD 10-11 per barrel GRM as against the Singapore GRM of USD 8 per barrel. But USD 13.5 per barrel betters that expectation. What else do you think would have gone right? With GRMs at USD 13.4 per barrel and net profit at Rs 4,122 crore, do you expect that petchem margins are better than last quarter?
Tulsian: The petchem margins seem to have contributed to the profitability of the company. I had taken a GRM estimate of USD 12.40 and that gave an EBIT of close to about Rs 2,891 crore. So, if we take a rise of USD 1 per barrel, I think the petchem has contributed quite a lot to the performance of the company in terms of margin growth. It may not be that much in volume growth but definitely margins have been better on the petchem side.
Q: What will all mean to the price of Reliance? If it has bettered the market's expectation, do you think there can be anything positive at all or in this market – is this going to be another result that will be shrugged off?
Tulsian: As there had been a lot of apprehensions on the Reliance results that probably that will be the trend setting in for the company in the next two-quarters to come. This result is definitely quite attractive and should at least give some confidence. Any kind of positive result is not being given credence by the market because it is dominated by so many other negative factors. But we may see a technical bounceback to around Rs 1,300 or close to that level.
Q: So you expect therefore a scope for valuations to improve? You are speaking about an EPS of Rs 100. The price today is Rs 1,215. Do you think there is headroom for the price to move?
Tulsian: Reliance Industries is not valued on existing operations. In FY10 with the contribution that would come in from Reliance Petroleum Refinery as well as from the KG Basin practically added to the current price trend of crude oil as well as of the GRM and the gas pricing having settled by the government, they should have an EPS of anywhere between Rs 175-180 for the full year. That should be factored while taking a valuation call on the stock. So, it definitely looks quite attractive. With an EPS of close to Rs 175 and a price of Rs 1,200, it translates into a P/E multiple of around 7. So, it definitely makes the stock quite attractive.
Q: With these numbers would you say that Reliance has given a positive surprise?
Jigar Shah: Certainly, on the refining margin side we are quite positively surprised. In our forecast we assumed refining margin at about USD 11 so the refining margins have come as a very good surprise.
Q: How would you rate the company's management of its interest costs and therefore what is your comment on the company's margins and its net profit?
Shah: As far as inventory and the treatment of foreign exchange is concerned, it is consistent with their own practice which defers although from the accounting standard but it is inline with their own practice and consistent. Secondly, the company's interest cost is going up because their capital expenditure continues. I don't think they are slowing down while the overall rate of growth in the economy for investment is coming down. That indicates a strength and confidence for the following quarter in the year.
The company's cash generation is very important because now the company is at the end of two major projects and there will be a lot more amount of free cash flow generation in the following year. This will help the addition of profits coming from the gas which is produced from KG basin as and when that commences.
So the increase in interest cost is not too relevant. Although, it does require some attention but it is not too relevant. This overall result in the situation of volatility that the petrochemical prices in the petroleum prices was extraordinary and it should have a really positive impact on the investors.
Q: I don't know if you have been able to go through the segmented revenues. Are there any highlights that you can spot? Petrochemicals revenues has gone up from Rs 12,961 crore to Rs 15,600 crore or thereabouts, a decent 25% jump. In refining revenues there is almost a 50% jump from Rs 23,500 crore, it has gone to Rs 36,500 crore. In oil and gas there is again a near 80% growth from Rs 598 crore to Rs 935 crore. That is the gross turnover. Any surprises, positive or otherwise?
Tulsian: If we don't take the YoY comparison, but the sequential, there definitely is an increase in petchem margins, which is about 12.2% on EBIT level. This was below 10% for Q1. The refinery segment margins were closer to 9.9%, which has fallen to 7.62%. But the drop in refinery margins is because of a fall in GRM from USD 15.7 for Q1 to about USD 13.4 for this quarter. But definitely there is a respectable jump in petchem margins for the quarter on a sequential basis.
Q: Do you have a price target now? Under the current circumstances do you think the positive surprise of the results will be factored-in or will be taken into account by the market? What would your price targets be, are you a buyer at current levels?
Shah: In my view this needs to be looked at from another one-year perspective. If you have a 2009-end kind of view, we are expecting an EPS or earnings per share of Rs 168 for FY09-10. Our fair value estimate is 2,500 with a target price in the current situation of the market at Rs 2,000 for the calendar year 2009-end.
So, you can say that in one year we expect a 50 -60% appreciation in stock value from here given the fact that their projects will come on stream and will create a sharp improvement in the net profits for the next year.
Q: Are there any other highlights you have that you can point out and as well your price target? Would you be a buyer?
Tulsian: The first half bottomline of Rs 8,232 crore, in two quarters has come on an identical basis, which is Rs 4,120 crore. In Q1 it was Rs 4,110 crore, and Q2 it is about Rs 4,122 crore. Probably the stock adjustment inventory benefits spilled over from Q1 to Q2, which has been able to keep the results intact at this level. But that may not be the scenario for the next two quarters. There definitely will be pressure on the refining margin and one should not be surprised if we see GRMs slipping to single digits, in Q4. It may fall to about USD 11-12.
You may not be able to see an EBIT margin of above 12% for petchem because they have seen single digit margin in the last 2-3 quarters on a sequential basis. So, there definitely will be pressure on volume growth as well for the petchem segment. Taking all this as we have discussed since they have an EPS of close to Rs 56 all will be expecting at least Reliance to post an EPS of over Rs 100 which should ideally be at Rs 105. So definitely we will be having the concern. But there is no point in taking call on the stock purely on fundamentals because even the current market price of Rs 1,200 does not factor in the fundamental valuation which is a case with all frontliners.
So if I just take a call based on FY10 earnings which is likely to be anywhere between Rs 175-185. One must have a longer horizon for the stock. Taking that into consideration being an integrated player and with Rs 175 to Rs 180, I have taken average of Rs 180. I think that should give a valuation of anywhere above Rs 2,000 because there is no point in talking about PE multiple of 15 or may be 12 at this stage when the share has got corrected to about Rs 1,200 it is better to expect a 50% rise from this level which translates into a value of about Rs 1,800. But going pure by the financial projections expected profits for FY10 – the share price should reach by that time to about Rs 2,000.
