Stock Pick From Refineries Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

We are recommending investment in Reliance Industries (RIL) stock in this edition of Choice Scrip as we can foresee another record setting quarterly performance coming from RIL led by refining and petrochemical segment with sustained margins, cost management, capacity, volume and demand growth.

RIL’s business focus includes refining, petrochemical, oil & gas, retail and other segments. Overall segment EBIT was up 24.7 per cent to Rs 35770 crore in FY16 on a yearly basis. Refining and petrochemical business benefited from strong demand and improved gross refining margins.

Refining- RIL’s refining EBIT margin expanded by 530 basis points to 10 per cent in FY16 on yearly basis. The company continued to record higher refining throughput of 17.8 million tonne with utilisation of 115 per cent much higher than its international counterparts. The highest ever in last seven years, Gross Refining Margin (GRM) stood at USD 10.8 per barrel in Q4FY16, a premium of USD 3.1 over that of Singapore GRM.

Petrochemical- RIL has restarted its Purified Terephthalic Acid (PTA) plants and is ramping up production with full capacity of 4.2 million at Dahej. In Q4FY16, the company witnessed robust demand growth across all end user sectors which eventually rise up demand for ethylene, polymer deltas (15 per cent YoY), polyester demand growth (7 per cent YoY). Its upcoming PX and MEG capacities will further enhance integration benefit.

RIL expects its polymer margin to remain stronger due to global ethylene operating rates are expected to rise to about 90 per cent by CY20 and the market is likely to remain tight as incremental capacity additions will be balanced out by higher demand growth. The commissioning of Refinery Off Gross Cracker (ROGC) project would sharply reduce cash costs of RIL significantly and make it globally competitive. RIL expects its polyester margin to remain stronger due to global polyester demand growth likely to be about 4 per cent led by diverse applications.

Reliance Jio Infocomm (RJIL) plans to provide 4G connectivity and services on pan-India basis and has acquired pan-India unified licence for the same. RJIL is the only private player with broadband wireless access (BWA) in all the 22 telecom circles. We expect RJIL to be a formidable player and garner 10 per cent to 12 per cent revenue market share over the next three to four years with 100-120 million subscribers at an Average Revenue Per User (ARPU) of Rs 250-300 per month.

On valuation front, RIL’s share price is trading at PE multiple of 11.42x times and it looks attractive in comparison to ONGC at 12.88x times, Gujarat Gas at 70.60x times. The company’s PEG stood at 0.91, PB multiple of 1.30x times looks attractive in comparison to Gujarat Gas at 3.32x times, Deep Industries at 1.97x times. Its EPS stood at Rs 84.70 in FY16 in comparison to EPS of Gujarat Gas Rs 11.11, Deep Industries Rs 14.01.