Though FY14 hasn’t been the best for Reliance Industries Limited (RIL)—net profits were up just 4.7% yoy to R21,984 crore—the stock outperformed the Sensex over the past year mainly in anticipation of the company being allowed to double gas prices from $4.2 per mmbtu. Though the immediate gain to the bottomline will be limited by the current low levels of production—analysts are pegging production at just 14 mmscmd, 16 mmscmd and 20 mmscmd in the three years starting FY15—near-market prices will mean the company will invest more in exploration and development of fields that have good potential. In the meanwhile, RIL’s $7 billion of investment in US shale assets is paying off well—FY14 revenues rose 45% yoy to $893 million, while ebitda increased 37% to $659 million. Though shale investments are a third those made in the Indian E&P—including interest costs on the investment—shale ebitda is higher than the $590 million for the Indian E&P.
Even if the E&P business contributes more—the Indian piece is deeply in the red—it will be the petrochemicals and refining pieces that will continue to drive earnings. Kotak Institutional Equities’ puts the sum-of-the-parts (SOTP) of the two at 63% of RIL’s share value based on FY16 earnings versus 16-17% for the E&P piece. The outlook for refining remains fairly good with margins expected to stay steady—in Q4FY14, it was RIL’s gross refining margin of $9.3 per barrel that stole the show. Analysts believe demand for plastics globally should stay firm though the polyester cycle may be weak for a couple of years. Despite the hype on the telecom piece, Kotak points out that RIL needs to capture a significant 30-40% of the voice and data markets to generate even a 10% return on investment—and that investment could be upwards of $14 billion if you include a $4 billion ebitda loss to gain market share. And while there’s no doubt RIL’s retail operations are gaining traction and have turned the corner, the small margins imply the turnover will need to treble from the current levels of R14,496 crore for the business to really start pitching in. In the near future, sticking to its knitting is what will continue to deliver value for RIL’s shareholders.