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Reliance Industries stocks are seen weak in the near term because of the headwinds in its core refining business coupled with a downturn in petrochemicals margins. Over the last few weeks, the global complex refining margins have weakened because of shrinking product spreads and increase in supplies. In 2012, 1 mln barrels per day capacity was added globally, and in 2013, another 1.3 mln barrels per day refining capacity will be added. We expect subdued refining margins over the next 12-18 months given our cautious outlook on the refining cycle due to large net additions to global refining capacity and weak oil demand resulting from a global slowdown. Over the past few weeks, the spreads on oil products such as gasoline, diesel, and jet fuel have shrunk significantly, and these products account for 65-70% of Reliance Industries' product basket. Concerns over the continued decline in gas output from the company's KG-D6 block will also weigh on its stocks, but the ongoing buyback of stocks will provide support at around 725 rupees.
Sharp decline in production is worrying. Gas output from KG-D6 has fallen below 26 mscmd now, from a peak of 62 mscmd. Stocks of state-owned oil marketing companies Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd also are seen subdued following the sharp decline in rupee vis-a-vis the dollar. The rupee has depreciated nearly 4% since the beginning of this month to 55.53 a dollar yesterday. The state-owned oil refiners import over 75% of their crude requirements and a weak rupee will mean higher cost of crude in rupee terms. The rise in crude prices over the past few weeks is adding to the companies' revenue loss on subsidised sale of fuels. Among the OMCs, we prefer BPCL due to its upstream exposure although we maintain our cautious view on its core R&M (refining and marketing) business.
