Sucheta Dalal :What ails the RIL scrip?
Sucheta Dalal

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What ails the RIL scrip?  

April 30, 2010

 The Supreme Court verdict on the Reliance Industries Ltd (RIL) and Reliance Natural Resources Ltd (RNRL)'s five-year fight and the prospect of a downgrade of RIL’s D-9 block has affected the share price of RIL over the past one month.


During the past 30 days, the weekly average price of RIL has fallen to Rs1,028 from Rs1,102 despite some good news coming out from the company. For FY10, RIL’s total revenues crossed the Rs2 lakh crore mark; it made a fourth discovery in the Cambay basin in Gujarat; the company announced a joint venture with Atlas Energy and also invested some money in Deccan 360.


“Although these (developments) were good news for RIL, there is no material impact of it on the share price. More so, the good news was evened out by downgrade of RIL’s D-9 block and there is the Supreme Court verdict expected next week, which may be a trigger point for the company’s share price movement,” said Saeed Jaffery, research analyst, Ambit Capital Pvt Ltd.


Last month, independent evaluator Hardy Oil and Gas PLC, a partner of RIL, evaluated a cut in the estimates in the company’s D-9 block by 51% following the first well in that block turning out to be dry. Hardy Oil said that the D-9 block in the Krishna-Godavari (KD) basin off the Andhra Pradesh coast, is likely to hold about 5.2 trillion cubic feet of gas compared with the earlier estimate of 10.6 trillion cubic feet.


Earlier this month, the company announced its fourth discovery in the Cambay basin in Gujarat. “The discovery is significant as this is expected to open up more oil-pool areas, leading to better hydrocarbon potential within the block,” the company said in a statement. Analysts, however, said that the discovery and its potential have already been factored into RIL’s share price.


Mr Jaffery said, “Although the discovery is good news, we have still not been able to quantify the same and cannot put any value on it. Since the discovery or potential of the field has already been factored into the share price, we do not expect the share price to react."


There has been relatively less exploration effort in other blocks and little news flow on RIL’s plans for its large inventory of discoveries as the company is more focused on KG-D6 in terms of both development and litigation. However, with exploration efforts moving up, and after the Supreme Court ruling, the company could surprise the market with more concrete plans for other KG-D6 discoveries and other discovered blocks, said an analyst who does not want to be named.


For FY10, RIL's total turnover rose 37% to Rs2 lakh crore from Rs1.5 lakh crore, while its net profit increased 6.1% to Rs16,236 crore. However, during the same period, its gross refining margin (GRM) fell to $6.6 per barrel from $12.2 per barrel. The company said during that period, light-heavy crude differentials were at their lowest in the past few years, while the Middle-East distillate cracks were under pressure due to industrial activity, low demand from the transport sector and high inventory.


“During the quarter to end-March, RIL clocked average GRM of $7.5 per barrel, significantly below our estimates of $9 per barrel. Premium in Singapore margins narrowed to $2.5, the lowest level seen in the past four years. However, the impact of lower-than-expected GRM was offset by strong volume growth of 111% to 16.7 million tonnes per annum (mtpa), which indicates refinery utilisation of 108%,” said KR Choksey Shares and Securities Pvt Ltd, in a report. 


Speaking about the petrochemicals (petchem) business of RIL, where the company's margins increased 14.4% against 13.9% in the previous quarter, the brokerage said that robust domestic demand is building expectations of strong consumption in the coming quarters for the company.


"However, once the new large petchem plants in the Middle-East and China start operations, higher product supplies will put pressure on margins. Nevertheless, in the short term, strong domestic demand, coupled with planned maintenance shutdowns at crackers will continue to maintain healthy petchem margins," KR Choksey added.


Rohit Nagraj, research analyst, Prabhudas Lilladher Pvt Ltd, said that the brokerage believes that the worst is over for refining and it expects refining margins to improve hereon. "Near-term worry on the ongoing battle between RIL and RNRL continues to remain a concern," he added.


Next week, the apex court is likely to announce its verdict on the natural gas price war between RIL and RNRL. Last year in July, the Bombay High Court had asked RIL to supply 28 million standard cubic metres a day of gas to RNRL at $2.34 per million British thermal unit for 17 years. RIL then moved the Supreme Court alleging that the High Court had erred in deciding quantity, tenure and price of gas supply to the power plants owned by RNRL or its units.


Although no one is willing to speak on the record, some analysts believe that looking at the earlier judgements of the apex court, which were filed challenging the High Court orders, one gets a feeling that the verdict may not be positive for RIL.

 — Yogesh Sapkale

-- Sucheta Dalal