Investor's Eye: Update - Reliance Industries (Rupee's depreciation and new gas discovery augur well), Fertilisers (Normal monsoon improves demand for fertilisers)

 

Investor's Eye [August 27, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Reliance Industries Recommendation: Buy Price target: Rs1,010 Current market price: Rs804 Rupee's depreciation and new gas discovery augur well In this note we are analysing the new gas discovery at Reliance Industries Ltd (RIL), the trend of the company's refining margin and the impact of the sharp depreciation in the rupee against the dollar on the company's business. New gas discovery to address falling gas production  RIL has announced a new gas condensate discovery (D-56) off the east coast in the Cauvery basin. The Cauvery block has a potential to produce about 15 million standard cubic metres (of natural gas) per day (mmscmd). The find, D-56, is the second discovery in the block. The first discovery, D-35, in the block was made six years ago and was estimated to produce 4mmscmd of natural gas. However, this was not approved as it was found commercially unviable at the prevailing gas price of $4.2 per unit. With the oil ministry's approval to implement the new gas price formula recommended by Rangarajan Committee, the second gas discovery of RIL, D-56, along with the first discovery, D-35, will become commercially viable to operate. Hence, the development is positive for RIL and will address the issue of falling gas output from its current field. However, production from the new gas discovery could take around two years.  Sharp depreciation in rupee against dollar to benefit all business segments Since the company has a higher share of exported-oriented revenues in its refining as well as petrochemical business, the 10% depreciation in the rupee compared with the average rupee-dollar rate during Q1FY2014 augurs well for the company as it will improve its realisation. Further, RIL's exploration and production (E&P) division will also witness an improvement in its realisation on account of the softening of the rupee. According to our rough-cut estimate, the recent depreciation in the rupee could result in an upgrade of 2-3% in our earnings estimates for FY2014 and FY2015. However, currently we are not incorporating the impact of the rupee's depreciation on our earnings estimates as we will like to wait till the rupee stabilises.  Weak gasoline crack drags refining margin in August; Q2 GRM could be lower QoQ  After improving in July 2013 the gross refining margin (GRM) of the Singapore Complex has witnessed a sharp contraction in August 2013 on account of weakness in the gasoline crack. The recent GRM is lower by $2 per barrel compared with the GRM witnessed in July 2013. The average GRM for the July-August period is marginally lower (by around $0.5 per barrel) compared with the average GRM for Q1FY2014. However, if the GRM sustains at the current levels till September 2013, the refining companies could post a sequential contraction in their GRM in Q2FY2014.  Outlook and valuation Given the recent depreciation in the rupee, the realisation of all business divisions of RIL is likely to improve resulting in earnings upgrades. Further, the discovery of a new gas block in the Cauvery basin augurs well for the company and could address the falling gas production issue. In addition, the revision in the price of gas from April 2014 and the likely approvals for further development of the Krishna-Godavari D6 block could be positive for RIL and provide visibility of its earnings growth going ahead. Hence, we maintain our Buy recommendation on the stock with a price target of Rs1,010. Currently, the RIL stock is trading at price/earnings ratio of 12.7x and 11.2x of FY2014 and FY2015 estimated earnings respectively.    SECTOR UPDATE Fertilisers Normal monsoon improves demand for fertilisers Key points Normal monsoon further improves monthly demand of fertilisers: The demand for fertiliser has witnessed a further improvement on account of a normal and prolonged monsoon across the country, and correction in the prices of non-urea fertilisers. For the country as a whole, the cumulative rainfall during this year's monsoon season has been 13% above the long period average (LPA) till August 14, 2013. The aggregate sales of the fertilisers during July 2013 (by 15 leading manufacturers) have improved by 14% as compared with the same period of the last year. The higher sales of fertilisers during the month were mainly led by a sharp improvement in the sales of urea and muriate of potash (MOP) fertilisers.  Initial lower volumes (April and May) affecting sales on YTD basis: The total fertiliser sales declined by 5% on an YTD basis as compared with the same period of the last year on account of a decline in the demand of indigenous fertilisers along with a steep decline in the demand of imported diammonium phosphate (DAP) and complex fertilisers. A decline in the imports of fertilisers was largely on account of high inventory levels of non-urea fertilisers in the market. The sales of DAP and complex fertilisers were lower by 24% and 31% respectively. On the other hand, the sales of urea and MOP have witnessed a good improvement as compared with the same period of the last year. Performance of southwest monsoon till date (June 1 to August 14): India continues to receive excess rainfall during this year's monsoon season (except east and northeast India). Out of the 36 meteorological sub-divisions, the rainfall has been excess in 17 sub-divisions, normal in 13 sub-divisions and deficient in 6 sub-divisions (Arunachal Pradesh, Assam and Meghalaya, Nagaland, Manipur, Mizoram and Tripura, Jharkhand, Bihar, Haryana, Chandigarh and Delhi). In area-wise distribution, 86% area of the country received excess/normal rainfall while the remaining 14% area received deficient/scanty rainfall. Outlook: The early arrival of monsoon coupled with an above normal rainfall across the country at the beginning of the sowing season has brightened the prospect of a robust sowing across the country. An increase in the sowing acreage will ultimately improve the demand for the fertilisers, which have witnessed a severe demand destruction last year due to drought in key crop-growing areas. But on the other side, the high inventory levels in the system will restrict the imports of the complex fertilisers. So going ahead, the imports of non-urea fertilisers will remain on the lower side. From a long-term perspective, we have a positive view on the fertiliser sector. In the fertiliser space, we prefer stocks like Chambal Fertilisers, Coromandel International, Gujarat State Fertilizers and Chemicals (GSFC) and Rama Phosphate looking at the attractive valuation after the recent price correction. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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