Higher Petchem Spreads May Not Offset Other Risks For RIL, Says CLSA

Shares of Reliance Industries Ltd. surged as petrochemicals spreads rose, raising hopes that it will boost its earnings. CLSA, however, doesn’t see that as enough to offset risks of low refinery margins or a delay in the telecom tariff hike.

The spreads across polymer, intermediates, and polyester value chain—the gap between the price of a barrel of polymers and benchmark crude—have surged before paring some gains. The Asia PVC-Ethylene spread surged 18% between March and April before declining 5.6% in the last week of May 2021, according to Bloomberg data. CLSA estimates that the spot petrochemicals spreads may drive a 3% uptick in Reliance’s consolidated operating income in over fiscal years 2020-21 to 2022-23.

Yet, the upside to the stock beyond the 13% surge in the last eight days may be limited, CLSA said. That’s because while the brokerage has assumed an optimistic rise of over $10 in RIL’s GRMs in the next two years, the benchmark Asian gross refining margin futures continue to languish at $2.5 a barrel.

A $1 a barrel slip in GRMs would hit the CLSA’s estimated FY23 Ebitda by $0.5 billion and could erode the gains from the spike in petrochemicals margin, it said. Moreover, the earnings estimate also include the price hikes by Reliance Jio Infocomm Ltd. in October this year and a delay could pose another risk to the forecasts.

Refining margins and Jio price hikes contribute nearly 75% of RIL’s estimated earnings growth over FY21-23.

While Reliance’s FY21 annual report said that oil-to-chemicals unit demerger will enable strategic partnerships, it omits any mention the Saudi Aramco’s deal. CLSA said the deal is not imminent and may limit the near-term upside for the valuation of the O2C unit.

Positive announcements from the upcoming annual general meet may provide a trigger for the stock in the next two weeks but CLSA doesn’t see a big upmove.

The brokerage, however, remains positive on the long-term prospects of RIL’s e-commerce and tech businesses. Its retained ‘outperform’ rating with a 12-month price target of Rs 2,250, implying an upside of about 3%.

Jefferies, however, is more optimistic about the impact of rising polymer spreads. This could drive a 14% upside on consolidated Ebitda estimate, the research firm said in a May report. Jefferies has a higher price target too Rs 2,580 apiece, suggesting a potential upside of about 30% for RIL's stock.

RIL was trading nearly 1% lower as of 2:45 p.m. on Friday at Rs 2,188 apiece compared with a 0.2% decline in benchmark Nifty 50.