- Refining and Petrochemicals sector holds a 15 per cent downside risk to Reliance Industries’ (RIL) estimated FY20 earnings.
- Consensus earnings estimates have been cut by 12% for FY20 over the last few months.
- JP Morgan currently not lowering its estimates for FY20 as it will look for a sharp recovery in GRMs in the second half.
According to an article published in Business Standard, the Refining and Petrochemicals sector holds a 15 per cent downside risk to Reliance Industries’ (RIL) estimated FY20 earnings.
IMO 2020 regulations
Analysts said there could be more cuts to estimated earnings if the expected IMO 2020 regulations disappoint.
The analysts added a 12% to 20% tariff hike could help offset the core business, though there are no signs of tariffs moving higher. Additionally, the brokerage is expected to be lower at 9%, if refining margins rebound.
RIL leveraged to oil prices
According to the analysts’ report, there is a 15% downside in spot refining and petchem margins. Lower oil prices would also influence RIL, as the new projects’ (gasifier, ROGC, ethane shipping) profitability is more leveraged to oil prices.
RIL’s gross refining margins (GRM) have been under pressure for the last few quarters. GRM for the March quarter was at $8.2 per barrel, compared to $11.1 per barrel reported in year-ago quarter.
The March 2019 quarter GRM is the lowest since the October-December 2014 period, which was at $7.3 per barrel.
Switch from 3.5% to 0.5% Sulphur
The International Maritime Organisation (IMO) regulations require shipping companies to switch their bunker fuel from 3.5% to 0.5% sulphur content by January 2020.
The new regulation is expected to boost margins for refiners like RIL. The analysts in their investment thesis added that consensus earnings estimates have been cut by 12% for FY20 over the last few months, and more cuts are expected if IMO 2020 disappoints or the PX cycle turns weak.
Views of JP Morgan
Brokerage firm, JP Morgan said that it is currently not lowering its estimates for FY20 as it will look for a sharp recovery in GRMs in the second half. It is waiting for the Infrastructure Investment Trusts (InvIT) related payment commitments from Jio to be available.
The report said that there would not be any reported earnings per share (EPS) impact, if RIL capitalizes the fixed payments at Jio.
Did you subscribe to our daily newsletter?
It’s Free! Click here to Subscribe!
Source: BusinessStandard
