Surging refining margins, possible cut in interconnect fees to boost RIL numbers

The average regional GRM in the current quarter is around $8 per barrel, up 20% from the previous quarter. NSEBSERILLoading data…

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            ChartsValuation & Peer ComparisonCommunity BuzzPEER COMPANIESHPCLBPCLEXPAND TO VIEW ALL ET Intelligence Group: Higher regional refining margin and probable reduction in the interconnection usage charges (IUC) for the telecom segment may improve earnings of Reliance Industries (RIL). These may also help its stock to catch up with peers after underperforming in the past three months due to lack of triggers.

            The RIL stock has gained 18% since June 30 while other refining and marketing companies including BPCL, HPCL and IOC have gained 12-24% on the bourses in the same period.

            The refining segment of RIL, which accounts for nearly two-thirds of the company’s operating profit and revenue, got a shot in the arm after Singapore gross refining margin (GRM) -a regional gauge —surged to a year high of $ 10.5 per barrel, compared with $ 6.4 in the June 2017 quarter. This was following refinery shutdown in the US due to hurricane Harvey .

            The outage in the US has closed nearly 20% of the total refining capacity of the US (around 3,635 kilo barrel per day), which has boosted margins on most of the auto fuels such as gasoline and diesel. In addition, higher import demand from India, seasonal increase in the LPG demand from petrochemical companies and lower Chinese export quota this year supported the regional refining margin.

            The average regional GRM in the current quarter is around $8 per barrel, up 20% from the previous quarter.

            RIL’s GRM is usually $3.5-4 higher than the Sing apore benchmark for each barrel. In the June quarter, the company’s GRM was $11.9 per barrel. On average, every dollar of improvement in GRM leads to 7-8% increase in the projected earnings per share (EPS) for RIL.

            The petrochemical business which accounts for one-third of the company’s operating profit is also likely to benefit from the shutdown in the US of ethylene capacity after the hurricane. According to data and analysis agency , IHS, around 35% of the US ethylene capacity has been taken offline. The chemical margins for the key products such as PE, PET, PTA, PP , and PX went up by 8-25% from a quarter ago.

            These factors are likely to result in a 10-12% earnings growth for the current fiscal.

            In addition to core operations, the projected EPS for the telecom division, Reliance Jio Infocomm (RJio) may improve if the inter-connect charge (IUC) falls. IUC consists of fees paid to other telecom companies for call termination.

            According to an ET report, the telecom regulator is looking to halve the IUC charge to 7 paise per minute.

            IUC accounts for nearly 12-20% of the cost of RJio, which means a reduction will translate into significant savings.

            According to CLSA, a broker, lower IUC may add up to 13-14% to RIL’s FY19-20 consolidated EPS. This may also boost the fair value of the company by 8%.RIL’s stock was traded at `1,644.6 on Wednesday .

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