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MOSL: RELIANCE INDUSTRIES (Downgrade to Neutral)-Weakness ahead in refining and petrochem

Reliance Industries: Weakness ahead in refining and petrochem; Downgrading to Neutral due to limited upside

(RIL IN, Mkt Cap USD127.6b, CMP INR1388, TP INR1457, 5% Upside, Downgrade to Neutral)

 

• RIL's stock price has almost tripled over the last five years, outperforming the Nifty by 122% on a cumulative basis. This has been driven by the strengthening refining/petrochem businesses and the significant build-up in its retail and telecom segments.
• Since our upgrade in Oct'17, RIL has rallied by 59%, outperforming the Nifty by 44%. The stock now trades closer to our fair value. Moreover, we expect the core business to face headwinds in 2019.
• While telecom and retail remain in a significant build-up mode, we have already factored this in our estimates. As there is limited upside from here, we downgrade the stock from Buy to Neutral. 

Refining margins to remain under stress in 2019

• We expect refining capacity addition of 2.6mbopd in 2019, much ahead of demand growth of 1.1mbopd. This, combined with high product inventories, is likely to result in subdued GRMs in FY20.
• Arab Lt-Hv has also contracted to USD1.4/bbl in 4QFY19 due to production cuts in OPEC+ and lower exports from Iran/Venezuela.
• We cut our FY20 GRM estimate for RIL by USD0.9/bbl. Low LNG prices would also limit the benefits of the petcoke gasifiers. 

Petrochem margins soften in light of expansions

• Expansions in the US/China are likely to result in total incremental petrochem capacity of 7mmtpa in 2019 itself, more than the 6mmtpa added in 2017/18.
• PE-naphtha margin has shrunk to 24% below its five-year average. PP-naphtha margin is 7% lower and PVC margin is 3% higher than the five-year average.
• Asian PX margins are likely to remain subdued in 2019 due to mega expansions in China. However, increased supply of PX and non-commensurate expansion in PTA are likely to result in healthy PTA margins. Large expansions in China are also likely to keep MEG margins under pressure.