RIL reports flat Q3 profit but analysts remain upbeat

Reliance Industries shares fell as much as 1.7 per cent on Monday reacting to December quarter results that was announced on Friday. The energy conglomerate's Q3 net profit of Rs. 5,511 crore was higher than the Rs. 5,340 crore estimated by Reuters, but the beat did not come from the company's core operations.

In fact, RIL's gross refining margins (GRM) for the December quarter declined to $7.6/barrel as compared to $7.7/barrel in the September quarter. The refining business accounts for more than 80 per cent of RIL's total revenue.

It was the other income component, which jumped 32 per cent year-on-year to Rs. 2,305 crore in the December quarter, that bolstered the RIL's bottom line, analysts said. At the end of the December quarter, RIL held cash reserves of $14.4 billion.

Despite flat earnings growth, Prayesh Jain, AVP (research) at domestic brokerage IIFL, said RIL shares could get re-rated after underperforming the broader markets for an extended period.



Mr Jain said that the overall results were in line with expectations but there was some disappointment in petrochem business due to plant shut down. Going forward the petrochem business would recover, he added.

Mr Jain also added that RIL's exploration and production (E&P) business could have bottomed out. RIL has forecast a 15 million metric standard cubic metres per day (mmscmd) gas production from April and combined with the gas price rise, it only could add boost RIL's profit, he said.

The government has notified a new natural gas pricing formula that will almost double the rate of all domestically produced fuel to $8.2-8.4 per unit starting April 1.

Reliance Industries will benefit from the gas price hike but it will have to submit a bank guarantee to cover its liability if the charges of hoarding gas by deliberately producing less during last three years, are proved.

"If RIL sustains 15 mmscmd gas output in the next year and as market price doubles, just from this RIL's profit could growth by 6-7 per cent in the first quarter of fiscal," Mr Jain said.

He added that RIL's gas business might have seen the worst, unless the arbitration goes against the company or it is denied approvals. In FY18, the gas output could go up to 18 mmscmd or even higher after the satellite KG D6 wells start producing, he said.

Asia-Pacific focussed brokerage CLSA said RIL is now closer to operational and financial turnaround.

Macquarie said upstream (E&P) continues to be biggest driver of sentiment for RIL. For the December quarter, RIL's E&P revenues rose to Rs. 1,730 crore from Rs. 1,460 crore in the previous quarter.

Bank of America Merrill Lynch said upside to fiscal year 2013-14 earnings per share (EPS) cannot be ruled out. RIL may report its highest ever quarterly profit in Q4, the domestic brokerage added.

Stock target

IIFL has a buy rating on RIL with a target price of Rs. 1027, which means an upside of over 18 per cent from current levels.

IIFL expects the stock could get re-rated as its "earnings could move into the next orbit". The brokerage sees RIL's FY14 earnings per share at Rs. 68, FY15 at Rs. 78, FY16 at Rs. 90-95 and FY17 at Rs. 110, when its off gas-cracker projects comes on-stream.