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Wednesday, April 28, 2010

RIL downgraded on lower margins

The country’s biggest company by market value, Reliance Industries Ltd (RIL), was downgraded by Sanford Bernstein and Co. to market perform on expectations of lower margins and a slowdown in the development of new petroleum areas.

Refining margins will remain weak for longer, petrochemical margins will be squeezed through new capacity additions, and upstream growth will stall until the next phase of developments come on-stream in 2014, Hong Kong-based analysts Neil Beveridge and Angus Chan said in a report on Tuesday. Slower upstream growth and weak downstream margins will lower returns, which could erode RIL’s valuation premium.

Bernstein lowered the target price for RIL’s shares to Rs1,160 from Rs1,250, when the brokerage had an outperform rating on the stock. RIL fell as much as 4.8% in Mumbai, the most since 3 November, and closed 0.9% lower at Rs1,061.25.

Net income in the three months ended 31 March rose 30% to Rs4,710 crore, or Rs 14.40 a share, from Rs3,630 crore, or Rs11.50, the Mumbai- based energy explorer and refiner said in an e-mailed statement on 23 April.

While we remain positive on RIL’s long-term potential, we are turning more cautious on the near-term growth outlook, Bernstein said. As such we are downgrading RIL.

Profits from processing crude oil may remain under pressure because of a large increase in Asian refining capacity, Goldman Sachs Group Inc. said in February.

RIL’s 1.24 million barrel-a-day Jamnagar refining complex in Gujarat operated at 108% of capacity, according to the statement. RIL earned $7.50 on every barrel of crude turned into fuels in the quarter, the company said. That compares with $9.90 a barrel reported a year earlier.

The explorer and refiner, controlled by Asia’s richest man, Mukesh Ambani, increased output of natural gas from the KG-D6 field off India’s east coast as accelerating economic growth spurred demand from power and fertilizer producers.

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