Will retail, shale drive Reliance Industries FY14 earnings?

While it was refining division that saved Reliance Industries the blushes during the fourth quarter of FY13, questions are being raised as to whether it will remain the growth driver going forward.

Analysts are almost unanimous in that the company’s core business is unlikely to be the growth driver for the company in the medium term.

[caption id=“attachment_705142” align=“alignleft” width=“380”] According to a Barclays research report the company’s $12 billion downstream projects and revival of domestic E&P will happen only from FY16-17. Reuters[/caption]

According to a Barclays research report the company’s $12 billion downstream projects and revival of domestic E&P will happen only from FY16-17. Until then, margins outlook and non-core investments are likely to be the driver for the share price.

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The brokerage is encouraged by the Ebitda breakeven and greater disclosure on the retail venture and also the 85 percent on year increase in shale Ebitdato US$0.5bn in FY13.

Echoing the view is Goldman Sachs. “Shale is becoming meaningful with Ebitda rising to more than 6% of its total in FY13 vs. less than 3% in FY12 and Henry Hub prices rising above US$4/mmbtu. Also, RIL retail achieved cash flow break-even in FY2013 and now operates 1,466 stores covering almost 9mn square feet,” it said.

Barclays is also upbeat about the company’s telecom business as RIL has finalised agreements and implementation plans on technology partners, service providers, infrastructure, applications and devices manufacturers.

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“The real test, though, on capex, the proposition, user traction and incumbent defense will likely come only on rollout, which may still be nine to 12 months away, in our view,” it said.

As far as margins outlook is concerned, the company expects the improving economic sentiment and strong gasoil demand to support refining margins.

However, HSBC thinks otherwise as the Singapore complex refining margin that averaged USD8.74/bbl in Q4FY13 is already down to $4.86/bbl. “We expect downstream margins to remain under pressure in the near term, given the weakening demand outlook, coupled with increasing supply,” it said.

The upcoming coke gasification project is also likely to reduce the energy costs radically, thus boosting refining margins by over $2.5/bbl on completion, which is likely only in three years, Nomura said.

Goldman Sachs also feels that gasoil demand growth could lead to cyclical recovery in refining margins of RIL along with a structural uplift for refining margins from the petcoke gasification project.

Morgan Stanley sees increased contribution from shale gas and higher petchem profitability boosting RIL’s earnings in Fiscal year 2013-14.

“In F2016, we see a major lift to earnings as part of Petchem expansion and Petcoke gasification plants are commissioned,” it said.

However, according to HSBC outlook for the new businesses is “better but not significant yet, given the size of the company”.

According to the brokerage, RIL has invested about Rs 9,500 crore in retail business and $5.7 billion in shale gas, which means the combined FY13 Ebitda form the two was $483 million, or just about 6.5 percent of the invested capital.

Despite the positive Ebitda, net income from the retail business continues to be negative. The shale gas business reported a net income of $72 million.

“The two businesses are growing but yet not meaningful, given total consolidated FY13 Ebitda of $6.1bn and net income of $3.9bn for Reliance Industries,” it said.

(Disclosure: The Reliance Group has funded the promoter of Network18, which publishes Firstpost)