Over the past six years, the stock of Reliance Industries, controlled by India's richest man Mukesh Ambani, has languished especially after the fall in the company’s gas output from its offshore field.
The government’s decision last week to increase the price of natural gas from $4.2 per British thermal unit to $8.4 from April next year could well be the trigger for the stock’s breakout. What should also help is the rising output and revenues from its investment in shale oil and gas in North America and expansion of its retail business and 4G services in telecom. Revenues from its retail business have already topped . 10,000 crore and the company now wants to raise its share of revenues from these two relatively new businesses to diversify.
The new natural gas pricing formula based on the recommendations of a committee headed by C Rangarajan, who heads the PM’s Economic Advisory Council, will come into force from April 1. That will mean the benefits will start accruing from FY15. The consensus estimate on RIL’s FY15 earnings is close to . 80 per share — an annualised growth of over 11% over . 64.5 for FY13.
Apart from higher prices for the natural gas produced by the company from its Krishna Godavari D6 block, RIL should also start deriving benefits from its investments in the refining and petrochemicals businesses. At the company's recent shareholders meeting, Mukesh Ambani had said that the conglomerate would pour in $27 billion over three years across all its businesses. This should lead to doubling of operating profits within five years.
RIL will also be a major beneficiary of the government's decision to raise customs duty on polymers in May 2013 and the introduction of a 15% investment deduction allowance in Budget 2013-14.
But what will keep RIL’s potential gains under check is stagnating production in its offshore field. Production from the KG basin has fallen below 15 MMSCMD and any significant improvement in output will take time. Barclays Capital reckons that there could be a rebound in FY15 although material increases will come only in 2016-17, it says.
A Kotak Securities report also echoes this view saying that EPS accretion could be meaningful at higher levels of gas production. The brokerage expects higher output from FY17E onwards led by commissioning of satellite fields. Going by the recent decision of the government, the price of natural gas will be revised on a quarterly basis based on a formula. The pricing formula is linked to India’s imported gas prices. This will mean that gas prices should move up in the medium-term since India’s longterm contract with RasGas will see annual revisions and higher-priced LNG imports from Gorgon in Australia will kick off in 2014-15.
The increase in gas price eliminates a key regulatory overhang. The change in tide for one of India’s top companies by revenues and profitability is reflected in the movement of its stock share, which has gained nearly 17% in the past year outperforming the gain of 11% gain in the benchmark Nifty. This is at odds with its under-performance since 2008 and is perhaps an indicator that RIL may be on course to emerge as a value creator for long-term investors.
The government’s decision last week to increase the price of natural gas from $4.2 per British thermal unit to $8.4 from April next year could well be the trigger for the stock’s breakout. What should also help is the rising output and revenues from its investment in shale oil and gas in North America and expansion of its retail business and 4G services in telecom. Revenues from its retail business have already topped . 10,000 crore and the company now wants to raise its share of revenues from these two relatively new businesses to diversify.
The new natural gas pricing formula based on the recommendations of a committee headed by C Rangarajan, who heads the PM’s Economic Advisory Council, will come into force from April 1. That will mean the benefits will start accruing from FY15. The consensus estimate on RIL’s FY15 earnings is close to . 80 per share — an annualised growth of over 11% over . 64.5 for FY13.
Apart from higher prices for the natural gas produced by the company from its Krishna Godavari D6 block, RIL should also start deriving benefits from its investments in the refining and petrochemicals businesses. At the company's recent shareholders meeting, Mukesh Ambani had said that the conglomerate would pour in $27 billion over three years across all its businesses. This should lead to doubling of operating profits within five years.
RIL will also be a major beneficiary of the government's decision to raise customs duty on polymers in May 2013 and the introduction of a 15% investment deduction allowance in Budget 2013-14.
But what will keep RIL’s potential gains under check is stagnating production in its offshore field. Production from the KG basin has fallen below 15 MMSCMD and any significant improvement in output will take time. Barclays Capital reckons that there could be a rebound in FY15 although material increases will come only in 2016-17, it says.
A Kotak Securities report also echoes this view saying that EPS accretion could be meaningful at higher levels of gas production. The brokerage expects higher output from FY17E onwards led by commissioning of satellite fields. Going by the recent decision of the government, the price of natural gas will be revised on a quarterly basis based on a formula. The pricing formula is linked to India’s imported gas prices. This will mean that gas prices should move up in the medium-term since India’s longterm contract with RasGas will see annual revisions and higher-priced LNG imports from Gorgon in Australia will kick off in 2014-15.
The increase in gas price eliminates a key regulatory overhang. The change in tide for one of India’s top companies by revenues and profitability is reflected in the movement of its stock share, which has gained nearly 17% in the past year outperforming the gain of 11% gain in the benchmark Nifty. This is at odds with its under-performance since 2008 and is perhaps an indicator that RIL may be on course to emerge as a value creator for long-term investors.
No comments:
Post a Comment