RIL margins to rise to six-year high: CLSA

The shares of Reliance Industries Limited (RIL) shot up by 4.39 per cent on Tuesday following a global brokerage firm CLSA’s prediction that the company’s refining margins might rise to six-year high in the current quarter. The report, however, has warned about the rising expenditure in the telecom, which is pulling down the company’s valuation.

Driven by improvement in naphtha crackers, petcoke spreads, higher light-heavy crude differentials and shrinkage in internal loss due to the lower Brent price, RIL’s March quarter’s refining margin could rise $3 a barrel on a quarter-to-quarter basis to a six-year high of $10.3 a barrel.

“Our quarter to date benchmarks is up $1.5-1.7 a barrel. We estimate that inventory losses from falling crude might have pulled down gross-refining margins (GRMs) in 3QFY15 by at least $1.5 a barrel. Adjusting for these - and noting the $6 a barrel crude-price rise since January this year, Reliance could report a $3 a barrel QoQ rise in GRMs and 68 per cent QoQ rise in refining earnings before interest and tax (Ebit),” CLSA said in a note on Tuesday.

As a result, RIL’s shares closed at Rs 901 a share, 4.39 per cent, gaining Rs 12,300 crore of market value in a single day.

It said the massive refining expansion could drive Reliance to an all-time high quarterly PAT (profit after tax) of Rs 6,250 crore, up 11 per cent on a year-on-year basis and 23 per cent QoQ in 4Q. CLSA gave a target price of Rs 1,250 a share for Reliance.

CLSA, however, warned that this core business improvement has been completely ignored by the market on fears of a big rise in telecom capital expenditure, as Reliance has shown aggressive intent in the upcoming wireless spectrum auction. RIL has deposited Rs 4,500 crore as earnest money with the government so that it could bid for at least one block of 5 MHz spectrum nationwide in the 900 MHz band, together with all the air waves up for sale in the 800 MHz band. The auction is starting on Wednesday.

“While every $1 billion in extra Capex (capital expenditure) may be seen as a Rs 20 per share leakage from fair value, it is important to understand whether extra spectrum, if any, improves the business case for Reliance’s telecom venture,” CLSA asked.

Reliance has already spend close to Rs 60,000 crore in the telecom business and analysts have warned that they do not see any value creation for RIL’s shareholders in the medium-term of three to five years.

Some analysts have suggested that RIL should sell 25 per cent to 30 per cent of its stake in Reliance Jio to derisk its telecom business. Reliance sources have said in the past that they might look at selling part of stake in Reliance Jio only after achieving a particular level of scale so that it gets a good valuation.