Crack is showing, RIL struggles below Rs 2,000

'Crack' is showing, RIL struggles below Rs 2,000

Shares of Reliance Industries (RIL), India largest-private sector company, continued its slide on Friday on rising concerns over the oil and gas major's profitability. The stock shed over 3% to close at Rs 1,931.40, closing below the psychological Rs 2,000-mark for the second successive session. Analysts expect RIL’s bottomline and operating margins to be hit by the falling crude oil and crack prices, globally. Cracks such as diesel, jet fuel and gasoline are the products derived from refining crude oil.

Fears that the global economy is headed for recession and hurricane Gustav not being as worse as previously imagined has brought down oil prices to $101 from near $150 levels a few weeks back. This and the finished product mix of RIL will lead to weakening in gross refining margins (GRM) of RIL, analysts opine.

During the past couple of months, gas oil (diesel) cracks have come down while those of fuel oil have risen. However, since RIL does not process crude into fuel oil, it will be more hard-pressed than other refiners, a official with a oil firm said. “Simply put, the Reliance gross refining margin faces more downward pressure in the second quarter (July-Sept) than other refiners’ GRM which have fuel oil as part of their product basket,” the official said. Diesel, jet fuel and gasoline are among the major products sold by RIL.

According to the market talk, few analysts have downgraded their price targets for the RIL stock, which today vary from Rs 1,900 to Rs 3,800. However, as per Bloomberg data, only two analysts have a “sell” rating of the on the stock company. One of them, Sanjeev Prasad of Kotak says that his firm sees potential downside risks to its earnings estimates of RIL, since its earnings are highly sensitive to refining margins and weaker-than-expected margins could significantly impact their earnings.

“We could see a short-term rebound from current very low levels but we believe that refining margins will likely remain weak for the next 12 months at least led by weak global demand and large refining capacity additions later in the current year,” Mr Prasad wrote recently in a note to clients.
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Source:ET,BL