15% downside to RIL's earnings estimate, IMO 2020 key risk: JPMorgan

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The current weak environment for refining and petrochemicals holds a 15 per cent downside risk to Reliance Industries' (RIL) estimated FY20 earnings, brokerage firm JP Morgan said in a note. 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 anytime soon," they said. In addition, the brokerage expects the downside risk to be lower at 9 per cent, if refining margins rebound.

"At spot refining and petchem margins, there is 15% downside to our estimates (and more to consensus). Lower oil prices would also weigh on RIL, as the new projects’ (gasifier, ROGC, ethane shipping) profitability is more leveraged to oil prices,” analysts said in a report released on June 14.

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.

The International Maritime Organisation (IMO) regulations require shipping companies to switch from 3.5% to 0.5% sulphur content in their bunker fuel by January 2020. The new regulation is expected to boost margins for refiners like RIL. The analysts in their investment thesis added, “While consensus earnings estimates have been cut by 12% for FY20 over the last few months, we believe there could be more cuts if IMO 2020 disappoints or the PX cycle turns weak.”

JP Morgan also added it is currently not lowering its estimates for FY20 as it will look for a sharp recovery in GRMs in the second half and waiting for the Infrastructure Investment Trusts (InvIT) related payment commitments from Jio to be available. “If RIL capitalizes the fixed payments at Jio, there would not be any reported earnings per share (EPS) impact,” the report added.

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