Reliance’s oil-to-chemicals business seems to be in the right spot to leverage China’s climate crackdown

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Reliance’s oil-to-chemicals business seems to be in the right spot to leverage China’s climate crackdown
BCCL
  • Analysts expect RIL’s oil-to-chemicals business margins to lift in the coming quarters if China sticks to its climate change goals leading to cut down in their exports of petroleum products.
  • Higher oil prices, expectations of a refining margin recovery, and ramp-up of JioMart, larger telecom tariff hikes may continue to support the stock.
  • Reliance Industries is expected to release its September quarter earnings on October 22.
Indian oil-to-telecom conglomerate Reliance Industries (RIL) is expected to announce positive business growth especially in its oil-to-chemicals and telecom businesses for the July-September quarter.

Analysts expect RIL’s oil-to-chemicals business margins to lift in the coming quarters if China sticks to its climate change goals leading to cut down in their exports of petroleum products.

A report by Jefferies said it has a positive stance on RIL as its analysts “see potential for 10-12% upgrade to consensus oil-to-chemicals earnings before interest, taxes, depreciation, and amortisation (EBITDA) estimate for FY22 earnings if China sticks to its climate goals till the Winter Olympics in February 2022.”

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China is currently struggling with a severe shortage of electricity, which has left millions of homes and businesses struggling with power cuts including chemical manufacturing companies.

“With over 50% of its [RIL’s] refinery slate in diesel, RIL's refining profitability has improved sharply. If these elevated margins sustain till the Winter Olympics in February, RIL's refining profitability could improve by $0.8 billion over the second half of FY22 earnings,” said a report by Jefferies.

Currently, the company has four verticals -- oil-to-chemicals (O2C) business that houses its oil refineries, petrochemical plants and fuel retailing business, digital services that comprises telecom arm Jio, retail including e-commerce and new energy.

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Reliance’s oil-to-chemicals business seems to be in the right spot to leverage China’s climate crackdown
Flourish chart

The Singapore gross refining margin (GRM) is a benchmark of profitability for crude refiners and GRM is what the company earns from turning every barrel of crude oil into fuel. In June quarter, RIL fetched $6.6 per barrel, more than than the benchmark rate of $2.1 per barrel, according to the Jefferies report. In the September quarter, it is expected to have earned $7.8 per barrel.

Higher oil prices, expectations of a refining margin recovery, ramp-up of JioMart, and telecom tariff hikes may continue to support the stock.

Overall, RIL earnings will see a turnaround as analysts expect the earnings cycle to improve from here on. In the June quarter, RIL’s earnings were affected by the second wave of the pandemic as its consolidated net profit slipped 7% year-on-year to ₹12,273 crore.
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Reliance’s oil-to-chemicals business seems to be in the right spot to leverage China’s climate crackdown
Flourish chart

A report by JP Morgan says that with telecom tariff hikes around the corner, high refining margins they believe RIL’s earnings downgrade cycle is likely over for now. “We do not yet see an upgrade cycle, but believe in a market awash with flows, the positive news cycle should keep the stock supported given its large index weight and significant one-year underperformance,” added the report.
BrokeragesTarget price for RIL stock
JP Morgan₹ 2,609
Morgan Stanley₹2,925
Institutional Research₹2,845

Further, some key news flows, which could support the stock price of RIL are telecom tariff hikes, progress on the long delayed oil-to-chemical stake sale to Saudi Arabia’s Aramco, large investments in renewables and increased visibility on the progress of the renewable foray.

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