RIL margins to rise to six-year high: CLSA

The shares of Reliance Industries shot up by 4.31% on Tuesday following a global brokerage firm CLSA’s prediction that the company’s refining margins may rise to six year high. The report, however, has warned about the rising expenditure in 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 per barrel on quarter to quarter basis to a six-year high of $10.3 a barrel.

“Our quarter to date benchmarks are 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 bbl. Adjusting for these - and noting the $6 a barrel crude-price rise since January this year, Reliance could report a $3 a bbl QoQ rise in GRMs and 68% QoQ rise in refining Ebit,” CLSA said in a note.

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% on a year on year basis and 23% QoQ in 4Q. CLSA gave a target price of Rs 1,250 a share for Reliance.

RIL’s shares were trading at Rs 900 a share at 1 pm.

CLSA however warned that this core-business improvement has been completely ignored by the market on fears of a big rise in telecom capex as Reliance has shown aggressive intent in the upcoming wireless spectrum auction.

While every $1 billio nin extra capex may be seen as a Rs 20 pershare leakage from fair value, it is important to understand whether extra spectrum, if any, improves the business case for Reliance’s telecom venture.

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% to 30% of its stake in Reliance Jio. Reliance sources have said in the past that they may look at selling part of stake in Reliance Jio only after achieving a particular level of scale so that it gets good valuation.