The market may have been on a high, but behemoth Reliance Industries has been struggling on the bourses. The stock has lost about 15 per cent in the past six months, the usual problems of domestic exploration compounded by a few more issues.
One, the rout of crude oil prices has meant lower product realisations and inventory losses in key segments such as refining and petrochemicals. RIL’s consolidated profit in the December quarter fell 4.5 per cent. Two, the corporate espionage imbroglio, in which an RIL executive was among those detained, impacted the stock.
Despite all this, the RIL stock presents a good buying opportunity for investors with a long-term perspective. The valuation is not expensive. At ₹850, the RIL stock trades at about 11 times its trailing twelve-month consolidated earnings, lower than the average 12 times in the last three years.
On the business front, there is much to look forward to over the next two-three years. The company’s massive investments in the refining and petrochemicals segments should pay off.
The expansion programme in these businesses is on track, with $10 billion of the proposed $14-billion (about ₹85,000 crore) capital expenditure already incurred. Volumes and margins should expand from the next fiscal as the new revenue streams kick in.
While low crude oil prices impact realisations and cause inventory losses in the short term, the effect will wear off in the coming quarters. Benchmark refining margins have strengthened in recent months. Besides, with petrol and diesel prices now market-linked, RIL can re-look distribution opportunities. It plans to take the count of retail fuel outlets to 1,400 by the end of the next fiscal from 230 now.
The company is investing about ₹70,000 crore in the telecom business, and services are expected to roll out in the coming fiscal. Break-even could take a few years, but telecom can turn a significant profit contributor.
The domestic exploration business may continue to suffer due to unattractive prices, low output at the KG-D6 field, and ongoing regulatory troubles. But this segment now matters less; it accounted for less than 5 per cent of the standalone operating profits in the December quarter, down from nearly a third in 2010.
Doing well abroadMeanwhile, output in the international exploration business, mainly US shale fields, is rising. RIL’s retail business, while a small contributor to profits, is doing well. Its December quarter profit more than trebled over the year-ago period. The momentum should pick up with new store openings and as the economy improves. The company is also preparing for an online foray.
RIL’s cash hoard of ₹80,000 crore and a debt-to-equity ratio of less than one mean that cash is no constraint to funding expansion.