Morgan Stanley expects the upcoming earnings results to prompt an earnings upgrade cycle with chemicals in the driver's seat, before refining picks up by mid-2021
As oil giants struggle across geographies due to subdued demand, Reliance Industries (RIL) looks up for a bounce back in its oil and chemicals business with improved earnings from petrochemicals. Analysts expect recovery in RIL's overall earnings in the October-December quarter though refinery earnings remain flat.
RIL had invested around Rs 1 lakh crore in petrochemicals expansion until 2018. RIL wants to convert 70 per cent of its output from Jamnagar refinery and petrochemical complex to chemicals. At present, the complex produces 90 per cent fuels - primarily petrol, diesel, naphtha, kerosene and liquefied petroleum gas (LPG) - and the rest 10 per cent is chemicals.
Morgan Stanley said in its research report, "We expect RIL to report a 14 per cent quarter-on-quarter (QoQ) rise in EBIDTA and a 16 per cent QoQ recovery in earnings (though 5 per cent lower year-on-year), two-thirds of which to be driven by a recovery in petrochemicals EBIDTA, which we estimate will rise 26 per cent QoQ (4 per cent YoY)."
Bank of America Securities expects overall oil and chemicals earnings before interest and tax (EBIT) to be up 14 per cent QoQ led by steady momentum at the petchem business led by ongoing recovery. "We expect refinery EBIT to be largely flattish and modest improvement in gross refining margin (GRM)," it said.
After a year of volatility, the crude prices ended at about $51 a barrel in 2020. In April, the US crude plunged deep into negative territory and Brent dropped below $20 a barrel following COVID-19 pandemic and a price war between oil giants Saudi Arabia and Russia.
"We expect RIL to show 16 per cent QoQ increase in net profit to Rs 11,100 crore in third quarter, led by improving O2C (oil to chemicals) business, strong continued momentum at retail and steady Jio. Net income increase is further aided by 20 per cent QoQ decline in finance expenses due to cash coming in Jio Platforms and Reliance Retail from Google and financial investors, respectively," Bank of America said.
Morgan Stanley expects the upcoming earnings results to prompt an earnings upgrade cycle with chemicals in the driver's seat, before refining picks up by mid-2021. "Telecom EBIDTA to remain stable while retail should rebound back to near pre-COVID levels in terms of profitability," it added.
Bank of America predicts a strong sequential rebound of retail business, led by festive season footfalls. They expect net adds for Jio to remain relatively modest at 7 million (7.3 million in second quarter). Farmer protests in Punjab and Haryana against Reliance Jio had an impact, they added in the report.
Morgan Stanley sees energy earnings as the next potential catalyst in 2021 as investor skepticism on margins reduces. "Slowing capacity additions, industry consolidation and inventory unwinding are key themes that could surprise investors," they said. An energy-led earnings upgrade cycle should reverse the past quarter of under performance, it added.