The falling rupee is bringing cheer for Mukesh Ambani-controlled Reliance Industries (RIL).
RIL which exports two-thirds of its refined products, benefits from rupee's weakness as both - gross refining margins and petrochemical spreads are denominated in dollar. Thus a weaker rupee means bigger benefits.
In the past three months, rupee has depreciated 16% against the dollar.
"Domestic sales of refined products/ petchem products/exploration and production all bench marked to dollar, RIL is among the beneficiaries of the rupee's slide," said Samuel Lee and Neil Gupte of JP Morgan in their note on Reliance Industries.
Lee and Gupte added that RIL remains one of the best performing regional refiners year-to-date and estimate an average of 60/65/70 for the rest of FY14 will add 6%/14%/23% to RIL's FY14 earnings.
"While India’s macro outlook may remain a negative overhang on RIL's share price in the near-term, we believe that the underlying business remains fundamentally sound given its relative large exposure to Asia versus India (65% of revenue exports) and dollar based margins."This does however also increase debt, as the bulk of RIL's debt is forex denominated," said Lee and Gupte.
Furthermore, RIL will benefit from inventory gains on higher crude oil prices with Brent now hovering around $109/bbl against $100 barrel at the end of second quarter.
A downside to weaker rupee however,is an expensive dollar debt and potential reduction in domestic product demand due to higher crude cost. On the back of weaker refining margins and softer Indian equity market RIL’s scrip is down 13% in the past month.
While regional gross refining margin is down to $4.2 per barrel on slower demand, despite the weakness, second quarter average gross refining margin is the same as first quaretr at $6.6 per barrel with calendar year 2013 average 6% higher year on year at $7.3/bbl.
"RIL benefits from a weakening of the rupee across its segments. A weaker rupee will result in higher prices, in rupee terms, for both products and raw materials of RIL’s refining and petchem segments and hence, will translate into higher conversion margins," said Sanjeev Prasad and Tarun Lakhotia of Kotak Institutional Equities in their report.
The weak rupee and strong other income however, may come to RIL's rescue during the second quarter and help the company boost net profits while its EBITDA is expected to fall to a 19-quarter low, said Barclays Capital in its report.
"The outlook for second half appears better, helped by tailwinds from likely seasonally stronger refining margins and the continued rupee depreciation," said Somshankar Sinha and Pooja Gupta of Barclays Capital in their report.