Analysts predict continued high margins in Indian refining, petrochemicals

Reliance Industries headed for its biggest gain in more than four years on optimism improved refining margins witnessed in the last quarter will continue in the next.

The operator of the world’s biggest refinery complex rose the most since March, gaining as much as 4.7% to 974.50 rupees. The shares, which traded at 974.05 rupees as of 1:35 p.m. local time, are up 9.4% this week, on course for their sharpest weekly gain since the period ended September 2011.

Reliance Industries also let other refining shares higher, with Indian Oil, the nation’s biggest refiner, rising the most in eight months.

Earnings from turning crude oil into fuels have remained strong in the quarter started April 1, with gross refining margins in Singapore, an Asian benchmark, averaging US$8/bbl, compared with US$5.80 a year earlier, according to a June 14 note by Jefferies India.

“In the last two months, there has been a supply-demand mismatch in overall oil markets coupled with a pickup in US oil demand,” said Chakri Lokapriya, who helps manage US$3 billion of assets worldwide as chief investment officer at TCG Advisory Services. “Beginning of driving season will lead to better than expected GRM for Reliance. The stock is attractively valued at a 10-year low of 1.7 times book.”

Bharat Petroleum and Hindustan Petroleum, the second and third-biggest refiners, climbed as much as 3.2% and 3.8%, respectively.

Better Margins

Jefferies India expects bigger refining margins for Reliance Industries and other Indian refiners to continue in the first quarter, Jefferies India analysts Arya Sen and Swagato Sourya Ghosh wrote in the note. Petrochemical margins have also strengthened considerably in in the first quarter, benefiting Reliance Industries.

Reliance Industries got 72% of its revenue from converting crude oil into fuels in the year ended March 31, according to data compiled by Bloomberg. In April, the company controlled by the richest Indian Mukesh Ambani, reported its biggest quarterly profit in seven years, beating analyst expectations, as refining earnings increased.

Ambani told shareholders on June 12 Reliance Industries plans to roll out fourth-generation telecommunications services nationwide around December.

The US$16 billion investment will dovetail with Reliance Industries’ plan to introduce multiple e-commerce platforms and expand the company’s retail business, which currently has a network of more than 2,600 stores in 200 Indian cities.

Out of 43 analysts tracking Reliance Industries, 35 recommend buying and eight suggest holding the stock. Reliance Industries has risen 8.7% this year, compared with a 1.4% decline in the benchmark S&P BSE Sensex. – Bloomberg

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