The numbers hidden behind the results tell a story of zero-return businesses and lower prospects for the core units
The adage in the market of ‘Buying the rumour and selling the news’ is at play once again. Reliance Industries had moved from a low of Rs 796.75 to a high of Rs 943.80 ove15 days in anticipation of good results. The company obliged by declaring slightly better than expected numbers. But post results, the stock has taken a beating and fallen by nearly 4.3 per cent to Rs 886.30.
Despite an impressive performance by Reliance, which was applauded by the analysts, why did the stock fall?
The devil is in the details. The stellar performance posted by Reliance was largely on account of gross refining margin (GRM) touching $10.10 per barrel. But these numbers are unlikely to be repeated in future.
HDFC Securities in its result analysis say that they do not expect the GRM pop to last long and foresee a fall as product demand eases in the face of sluggish global demand. Kotak Securities expects refining margins for FY16 to be in the range of $8.6-8.7 per barrel, which is same as in FY15.
Analysts are building up a bull case on Reliance based on the commissioning of new capacity worth $25 billion. The company’s net fixed assets have increased from Rs 2.33 trillion to Rs 3.18 trillion over the past year, with more to be added in the current year.
However, it is the immediate future that is not as rosy. Production from Reliance’s oil and gas business continues to fall. With gas prices being cut in India and global gas prices, especially shale gas, stalling at lower levels, analysts are not expecting better numbers from this division.
In the March 2015 quarter, though the company posted a 9.3 per cent volume growth, revenue fell 48.1 per cent. Reliance has planned to arrest the decline in production but awaits key approvals from the government, including budget approvals for capital expenditure.
Its telecom initiative – Reliance Jio – is another cause for concern. Even after the launch, the division is expected to break even at the EBIDTA level after three years. Capital employed in the business has already increased from Rs 37,800 crore (Rs 378 billion) in March 2014 to Rs 52,400 crore (Rs 524 billion) in March 2015. Kotak Securities, in arriving at its target price for RIL, has given a nil value for its telecom as well as shale business.
A large amount of funds is blocked in similar investments that are not yielding any returns. In an interview with CNBC, Tarun Lakhotia of Kotak Securities said that out of the $61 billion total capital employed, 20 per cent is in telecom segment as of date, 13 per cent in shale gas, and about 17 per cent in core business projects.
In other words, almost 50 per cent of the group’s gross capital employed is not generating any returns.
Lakhotia added that the investment in telecom, which in future will be 25 per cent of the capital employed, is what is worrying the market. Lack of clarity on the timing of launch and its strategy is causing anxious moments for investors. Unless the company launches its telecom services and analysts are able to see traction in its subscriber base, anxiety over the stock is expected to continue.
