Core business facing headwinds

A A

Nov 26 2012, 05:01 IST

Tags: Kotak Institutional Equities | Business News

We see near-term headwinds for RIL’s core businesses from (i) lower refining margins, (ii) subdued chemical margins and (iii) a sharp decline in KG D-6 production. Value creation from RIL’s new projects is 3-4 years away and will depend on (i) assumptions of conversion margins and (ii) incremental gas production. We revise our rating on the RIL stock to Reduce from Sell after the recent sharp correction. An out-of-turn gas price increase is the key risk to our view.

We expect subdued refining margins over the next 12-18 months given our cautious outlook on the refining cycle due to (i) large net additions to global refining capacity and (ii) weak oil demand resulting from a global slowdown. Singapore complex margins have declined to break-even levels currently from $3.8/bbl in mid-October led by a sharp contraction of spreads for petrol, diesel and ATF. We highlight that these products contribute 65-70% of product slate for RIL’s refineries. There has been a $4/bbl dip in refining margins since mid-October; this is partly mitigated by a $1/bbl increase in the light-heavy differential.

The margins for key polymers remained weak in recent quarters, closer to their lowest levels in a decade. Though we have assumed lower petrochemical margins for RIL in FY2013-14, we do not rule out downside risks to our assumptions given continued weakness in global downstream demand.

We see downside risks to the management guidance on FY2013-15 production from KG D-6 block noting the recent sharp decline in (i) gas production to 24 mcm/d currently from

... contd.

Ads by Google

Single Page Format

1 | 2 | 3 | Next