Reliance Industries (RIL) reported quarterly (Q2) profit of Rs 54.9 bn (+3% q-o-q, +1% y-o-y), in line with consensus, but with better petchem/refining, and lower other income. GRMs (gross refining margins) moderated from Q1 levels, but remained more resilient than regional benchmarks. We remain positive on Reliance Industries’ core business expansion strategy, and we expect resultant organic earnings growth to drive stock performance. While E&P (exploration and production) continues to dominate headlines, we see Reliance Industries as attractively priced for the long term. Upgrade to OW (overweight), with a Mar-15 price target of Rs 1,000.
GRMs fell sequentially to $7.7/bbl (vs. $8.4/bbl in Q1), with weak demand post-US driving season, and pre-Ramadan Asian buying. However, Reliance Industries’s margins were more resilient than Singapore benchmarks due to a widening in light-heavy crude differentials. Petchems contribution was up 33% q-o-q with improving polymer margins, volumes and a weak currency. PX (paraxylene) margins remain robust, while yarn/fibre margins were pressured. Domestic demand remains robust and overall polyester chain spreads are being cushioned by Chinese cotton prices.
E&P news flow continues: D6 output continued to fall (to 14mmscmd – in line with expectations). News flow on the pricing front continues to influence stock performance–we factor in a price increase for RIL, as we expect the government to prioritise increasing hydrocarbon output.
Refining margins fell to $7.7/bbl with a fall in regional benchmarks due to a fall in demand post-US driving season. Throughput rose to 17.7 MMT (million metric tonne). Petchems contribution was 33% higher q-o-q, with better spreads (polymers) and volumes. Gas production continued to decline (14mmscmd vs. 15mmscmd in Q1FY14 and down 51% y-o-y). RIL has begun work on arresting this decline with workovers and sidetracks underway in D1-D3, while an additional well will be drilled in the MA area. Retail continues to grow–a mix of strong same stores sales growth and new stores opening helped increase turnover by 31% y-o-y basis. RIL now operates over 1,550 stores across 136 cities in India.
Petchems saw operating margins rise while O&G (oil and gas) Ebit margins were flat on a q-o-q basis. Refining and others margins fell sequentially. With O&G remaining weak, Refining and Petchems accounted for 93% of Pbit (profit before interest and taxes) during the quarter. At the end of Q2 Reliance Industries had cash and cash equivalent of $14.5bn.
Organic growth to drive earnings: We remain positive on Reliance Industries’s core business expansion