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HOUSE OF THE WEEK

Tuesday 16 October 2012

HSBC Downgrades Reliance Industries To 'Underweight'

The net profit of Rs 5,376 crore was more or less in line with the street expectations, but a large support from other income means the company's operations are under pressure.
The net profit of Rs 5,376 crore was more or less in line with the street expectations, but a large support from other income means the company's operations are under pressure.

Reliance Industries Ltd.
BSE
821.65
-1.55 (-0.19%)
Vol:376563 shares traded
NSE
821.40
-1.65 (-0.20%)
Vol:2260604 shares traded

MUMBAI: HSBC cut Reliance Industries BSE -0.15 %to 'underweight' from 'neutral' saying the energy conglomerate was unlikely to sustain a sudden jump in refining margins seen in August, while also citing concerns about the recent rally in share prices.

HSBC maintained its target price at 800 rupees. Reliance posted its fourth consecutive drop in quarterly profit on Monday but met market estimates, as refining margins rebounded and treasury gains from its huge cash pile bolstered profits.
Reliance Industries once again posted over $1 billion net profit in a single quarter in July-September '12 after a gap of three consecutive quarters. However, this is unlikely to impress investors as its petrochemical business dropped to a new low, while a large chunk of the profits came from higher other income.

The net profit of Rs 5,376 crore was more or less in line with the street expectations, but a large support from other income means the company's operations are under pressure.

If the global economic weakness results in a weakness in refining margins as well, the company could find it difficult to repeat its performance in next couple of quarters.

"Maintaining similar profitability in coming quarters appears challenging for Reliance IndustriesBSE 0.47 % given the macro economic trends that would put pressure on margins of refining as well as petrochemical segments," said Sandeep Randery, head of research with BRICS Securities.

A Morgan Stanley report on Reliance Industries last week cited expectations of a weaker margin environment in refining and a subdued outlook on petrochemicals as key factors before turning cautious on the company and downgrading it from 'Equal-weight' to 'Underweight'.

Petroleum refining was the sole driver of profitability in this quarter. The segment reported gross refining margin(GRM) - the differential between the cost of a barrel of crude oil and realisation from sale of refined products produced from it - at $9.5 per barrel.

This was the best number in last four quarters, but lower compared with $10.1 it had reported in the September 2011 quarter. This coupled with high operating rates boosted the profits from this segment to highest ever.

On the other hand, the petrochemicals segment that has been under pressure for a prolonged time witnessed its profit margins dip to historically lowest level of 7.9%


Edited By Cen Fox Post Team

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