Talking to ET Now, Mayuresh Joshi, Fund Manager, Angel Broking, says for Reliance, refining should do well but the petchem side of the business can be something of an outlier.
Edited excerpts:
ET Now:Reliance Jio profitability is at Rs 500 crore, what is your reaction?
Mayuresh Joshi: It is a phenomenal number and after the last quarter when they had really done well both on the top line and on the EBIT front, it is a commendable performance to report profits specifically on the Jio business. Again, a large part of the market believes that a significant amount of capital expenditure on the telecom side is largely behind and to that extent, the incremental capex is going to be far lesser and the synergies in terms of pricing, specifically in terms of even their lowest priced pack should ensure that ARPUs are probably maintained and the trajectory remains on the higher side. It is a very positive number from Jio to help the consolidated numbers of RIL along with its core businesses.
ET Now: The stock was up 1.5% going into the number, do you think it will witness some profit taking purely from the traders point of view with this kind of performance on Monday?
Mayuresh Joshi: It is a possibility but the petchem business was operating out of a very tough environment because Reliance is an integrated player. They have probably seen better margins than most players at least on the petchem side because LDP, HDP prices have actually moved up. Even if you look at the deltas, the gasoline deltas were probably lower and the aiding aspect would have come from jet deltas. Naptha deltas are probably aiding that but with the off gas cracker coming through specifically on the petchem side, the future quarters numbers will look far better.
At the same time, since they have started importing ethane, the costlier part of which was in the form of naptha, there will be significant cost savings happening on that front. And even the ethylene production should increase significantly. The petchem margins have been quite reasonable in my opinion and they should improve because of the integrated nature. The GRMs are on expected lines and over the next few quarters, as the gasifiers start coming through on the balance sheet in terms of that capex getting over again, it will prove to be the one aspect which can aid the earnings growth.
A large element of the next few quarters is going to be at the core business earnings, showing stability and improvement in earnings metrics and that will improve the results as whole. It is a possibility that there might be some profit booking but remember it is a good set of numbers specifically on the EBIT front because of the tough environment that RIL was working at this point of time, specifically in the petchem.
ET Now: How do you rate the refining environment right now? The trajectory around $12 has been maintained for six months now but there are sections of oil and gas industry globally which believe that refining may start turning soft going into 2018. What are your thoughts on refining as a whole for Asian refiners and refining margin trajectory?
Mayuresh Joshi: For Asian refiners, there might be some marginal softness creeping through but the dynamics are very much in favour of large refiners because the kind of demand situation that we are seeing at this point of time and the kind of additions that we are probably seeing in terms of refining capacities getting put up, somewhere, the refiners are going to benefit because of this demand-supply dynamics.
Secondly, if you look at how the core spreads are expected to pan out, it is a mix. Every quarter will probably see some amount of elevation or some amount of softness happening in either of the core constituents whether it is naphtha, jet or gasoline.
The spreads is something very critical from a refiners' perspective but somewhere the complexities that Reliance is able to manage and the way it does that because of the complexity of its refining plants, is the entire premise why it gets that premium of around $4 odd compared to the Singapore GRMs.
To a large extent, the softness can happen but Reliance is a better place because of its complexities and demand supply dynamics. Going into 2018 should actually favour refiners more and the margins should get protected with not a great downfall in terms of margins getting deteriorated. Refining should do well but the petchem side of the business is something that can be an outlier for Reliance.
ET Now: Do you think that is something that the street needs more clarity on whether or not the Jio business is going to suck in more money because it is a cash guzzling business?
Mayuresh Joshi: Absolutely. And again, that is one important figure that the markets will tend to watch out for and largely the kind of moves that we have seen so far in terms of pricing moving up, pricing moving down, that environment can still continue. Blended ARPUs can actually get reported.
The revenue market share that Reliance can actually garner going forward, what they do in terms of their capabilities on the fibre optic broadband is something to be observed, specifically in terms of R-Com assets. Further clarity from Jio could bring in higher estimates if they are able to clarify on an SOTP basis. But the core businesses are doing fine and as certain elements of their core businesses start coming through like petcoke gasifiers, the incremental earnings from the core businesses should come through.
They did a $17-billion capex in FY17. If the capex is expected to taper off this year and in coming years as well, unless they have ambitious capex plan which then again reworks a lot of numbers.
I remain positive on the stock. I am not ascribing any numbers unless I hear the concall, but the positive nature in terms of earnings outlook should continue and a disclaimer we own the stock in our funds.
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