We maintain our no-moat rating and fair value estimate
of Rs 950 per share for Reliance Industries. First-quarter
net profit rose 4% to Rs 62 billion versus last year. The
seasonal maintenance shutdowns of Asian refining and
petrochemical plants in this quarter led to tighter supply
and strengthening of product prices. We expected strong
margins in this quarter and were not surprised by an
increase in the refining margin to 7.6% versus 3.9% in the
last year and a jump in the petrochemical margin to 11.2%
versus 7.3% a year ago.
Our thesis that Reliance's core refining and petrochemical operations lack competitive advantage and are commodity-in, commodity-out businesses in industries with low barriers to entry is playing out. We do not see any reason to change our full-year refining and petrochemical margin assumptions as Asian petrochemical and refining capacity remains plentiful and significant sustainable upside in the margin is unlikely. July benchmark Singapore refining margins have moderated to $5.80 per barrel from $8 in the
June quarter, and Reliance's core margins will follow.
Longer term, we think margins are likely to decline as additional capacity is built in Asia.
At current prices, Reliance is close to fairly valued, in our
opinion. Upside to our fair value estimate may come with
greater visibility on the returns on invested capital in the
telecom segment. We expect total investment in the telecom business to cross $25 billion during 2016-20 as company plugs gaps in its pan-India infrastructure. This would imply that Reliance will need to demonstrate the ability to lure the top layer of the most profitable customers from its telecom rivals. High fair value uncertainty reflects the cyclical, fragmented, and competitive petrochemical and refining businesses. which dominate earnings.
