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RIL could remain range-bound, valuation likely to limit downside

Based on regional margin numbers, the Street was expecting a premium of $4.5-4.6 over the Singapore GRM.The actual premium ended at $4.1 for the quarter.

, ET Bureau|
Updated: Jan 17, 2017, 08.10 AM IST
ET Intelligence Group: Since mid-November there was a pre-earnings run-up in the shares of Reliance Industries -India's largest private sector company by profit -thanks to surging regional refining margins. But this may now fizzle out with the tepid performance of the refining segment in the December quarter.

Low profitability from the refining segment may put pressure on the stock but valuation comfort for traders may limit the downside.

In the last quarter, RIL's gross refining margin (GRM) was $10.8 a barrel against an expected $11.3 (with the benchmark Singapore GRM rising $1.6 to $6.7 per barrel).

Based on regional margin numbers, the Street was expecting a premium of $4.5-4.6 over the Singapore GRM.The actual premium ended at $4.1 for the quarter.

Buoyed by profit from sale of invest ments, RIL's net profit was above expectation. Other income rose 24% (yoy) to Rs 2,736 crore in the three-months ended December 2016 and contributed 23.8% to the total profit before tax -the highest in the past eight quarters. The company's cash and cash equiva lent was Rs 76,339 crore against Rs 89,966 crore in March 2016.

On the other hand, RIL's petrochemi cal business compensated for the slug gish growth in other divisions. Revenue and operating profit (EBIT) from petrochemical segment rose 17.8% and 25.5% (yoy), respectively. Operating profit margin for petrochemical business fell just 80 basis points sequentially to 14.4% though price of ethylene, a key raw material, is hardening.

If RIL's refining business continues to disappoint in the coming quarters, investors would be worried about revenue visibility from this segment (which accounts for two-thirds of revenue and profit). Also, it gives a steady cash flow necessary to fund new businesses like Jio that remains a known unknown for investors.

In the medium term, the stock will be influenced by RIL's ability to retain its telecom subscribers after the free-service period ends in March.

Considering FY18 estimated earnings, the stock is trading at a multiple of 11.25 times which is almost at par with its long-term average of 11.11.

In the near-term the stock is likely to remain rangebound. Any uptick would depend on the amount of incremental profit generated from the newly-commissioned downstream projects accounting for a total investment of $15 billion.
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