Reliance Industries NEUTRAL RESULTS REVIEW 4QFY17 25 APR Highlights of the quarter. CMP (as on 24 Apr 2017) Rs 1,414 Target Price Rs 1,375

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1 INDUSTRY OIL & GAS CMP (as on 24 Apr 2017) Rs 1,414 Target Price Rs 1,375 Nifty 9,218 Sensex 29,656 KEY STOCK DATA Bloomberg RIL IN No. of Shares (mn) 3,251 MCap (Rs bn) / ($ mn) 4,608/71,494 6m avg traded value (Rs mn) 17,879 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,449/926 3M 6M 12M Absolute (%) Relative (%) SHAREHOLDING PATTERN (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE Satish Mishra satish.mishra@hdfcsec.com Deepak Kolhe deepak.kolhe@hdfcsec.com Strong core vs. hazy noncore RIL s standalone numbers continued to impress led by a strong GRM ($ 11.5/bbl) and higher petchem margins. Q4 EBITDA was at Rs 113bn (+9% YoY), despite weak domestic demand for petchem (demonetisation). The benefits from a strong INR and lower tax rate boosted APAT to Rs 82bn (+13%). Strong GRM and petchem margins should continue, led by higher product demand at low crude prices. Challenging macros will have minimal impact, given RIL s efficient operations. RIL s capex of USD 18.5bn in refining and chemicals is nearing completion. The commissioning of these projects has begun, and they will be fully operational by 4QFY18. We are confident of incremental annual EBITDA of ~USD 3bn from these. RIL s standalone operations will generate FCF of more than ~Rs 350bn/year, starting FY19. There is no large capex in the pipe, neither standalone nor Jio s. Healthy cash flows will lead to an improvement in return ratios. However, we are concerned about the returns from Jio. The company has incurred a capex of Rs 1.8tn, and may further require an additional ~Rs 0.7tn by FY19E. With 72mn customers for Jio Prime signed up till Mar17, we RESULTS REVIEW 25 APR 2017 Reliance Industries NEUTRAL Our SOTP target for RIL is Rs 1,375/sh based on FY19E (6.5x EV/e for standalone refining/chemicals, Rs 41/sh from domestic E&P, 1x investments to Shale/Retail and 0.6x investments to Jio). Maintain a NEUTRAL. Highlights of the quarter Refining: The GRM stood at USD 11.5/bbl (+USD 0.7 QoQ). The sequential improvement was led by higher margins across light distillate and better crude sourcing. The premium over Singapore GRMs was USD 5.1/bbl (vs. USD 4.1 QoQ). Petchem: The domestic demand was lower in 2HFY17, owing to demonetisation. However, strong margins led to an EBIT of Rs 35bn (+27% YoY). Telecom is the key risk: RIL has invested Rs 1.8tn till Mar17 in RJio. There will be an additional capex of ~Rs 20bn in 1QFY18, after which the runrate will reduce. It is difficult to ascertain returns on these. Nearterm outlook: Progress in the core business is on track. Telecom outlook is hazy and will decide future trajectory. Any weakness below Rs 1,250 should be treated as a buying opportunity. doubt the ARPUs can sustain at breakeven levels. FINANCIAL SUMMARY (Standalone) (Rs bn) YoY(%) QoQ (%) FY16 FY17P FY18E FY19E Net Sales , , , , EBITDA PAT Diluted EPS (Rs) P/E (x) EV / EBITDA (x) RoE (%) Source: Company, HDFC sec Inst Research HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

2 RELIANCE INDUSTRIES : RESULTS REVIEW E&P business KGD6 KGD6 gas volumes declined further to 7.4 mmscmd ( 24% YoY). Oil volumes were at 0.28 mmbbl (33%). Gas price was at USD 2.8/mmbtu (35% YoY) and oil realisation was at USD 51.0/bbl (+35% YoY). The Side Track campaign in MA has been completed. MA4H and MA2 successfully put on production. PM Gas volume was at 14.8 BCF (18% YoY). Lower output was due to shutdown of wells due to integrity issues. Management has guided that production in the PM field is sustainable. CBM Phase1 development completed. Commenced commercial production in Mar17. Volumes should ramp up to ~2 mmscmd in 18 months. Blocks connected to the Indian Gas Grid via SHPPL / HVJ. GoI notified Marketing & Pricing Freedom Process of price discovery initiated. Shale Gas Gas realisation went up to USD 3.3/mmbtu (+59% YoY, +11% QoQ). Average realisation for 4Q increased by 16% QoQ, whereas volumes were at 39 BCFe (6%). Production (BCFe) Avg Realisation (US$/mcfe) Gas price (US$/mmbtu) Revenues ($ mn) EBITDA ($ mn) Refining business The throughput was at 17.5 mnt (2% YoY, 114% utilisation). GRM was at USD 11.5/bbl (+0.7 QoQ). This was led by higher margins in light distillate and better crude sourcing. The premium over Singapore GRM remained strong at USD 5.1/bbl vs 4.1 QoQ. The Singapore mix has a high share of fuel oil, where margins have reduced sharply. The spread for light distillate increased sharply QoQ (gasoline from 14.6 to 14.8 and naphtha from 0.3 to 1.1.) Losses in fuel oil increased from USD 2.7/bbl to 4.3. Gas oil spread was strong at USD 11.8 vs. USD The ROGC project will be commissioned in 2QFY18, and the petcoke gasification project in 3QFY18. The complete benefits of these projects will be visible in FY19. RIL maintains its guidance of an additional GRM of USD 22.5/bbl by replacing LNG with coke. Petchem and fibres Polymer: The spreads for PP, PE and PVC were above the fiveyear average, led by a strong demand at lower prices. The domestic demand for polymers was weak in 2HFY17, owing to the negative impact of demonetisation. Polyester: A pickup in demand improved margins. However, they remain below the fiveyear average. Retail It has achieved a critical mass, with FY17 revenues at Rs 280bn (excluding petro revenues). The segment is PAT positive, and gaining from operating leverage. The total investment in this business is ~USD 2bn. EBIDTA was at Rs 3.7bn (+66% YoY). RIL added 63 stores in 4Q, taking the total to 3,616. Page 2

3 RELIANCE INDUSTRIES : RESULTS REVIEW EBITDA growth was led by higher margins in petchem Interest costs were lower owing to a forex gain of Rs 2bn Tax rate is lower owing to benefits from projects Quarterly Financials Snapshot (Standalone) (Rs bn) YoY (%) QoQ (%) Revenues Material Expenses Employee Expenses Other Operating Expenses (0.2) EBIDTA Depreciation EBIT Other Income (36.0) (54.7) Interest Cost (59.9) 9.31 (74.8) PBT (5.8) Tax (20.8) (28.6) RPAT EO (Loss) / Profit (Net Of Tax) APAT EPS Margin Analysis YoY (bps) QoQ (bps) Material Expenses As % of Net Sales Employee Expenses As % of Net Sales (21) Other Expenses As % of Net Sales (283) 13.2 (108) EBITDA Margin (%) (390) 17.2 (36) Net Profit Margin (%) (233) 13.0 (84) Tax Rate (%) (593) 24.5 (592) Page 3

4 RELIANCE INDUSTRIES : RESULTS REVIEW Refineries Performance RIL s GRM trend vs. Singapore Complex GRM Crude Throughput (mnt) GRM improved QoQ led by (1) An improvement in gasoline margins, (2) Narrowing of discount between ALAH and (3) Higher sales in the domestic market. Premium over Singapore GRM remains high $/bbl RIL GRM Singapore GRM mnt Polymers Performance Polymers Production Polymer Margins (Indicative Industry Spreads) PP and PVC volumes were lower due to a maintenance shutdown PE, PP and PVC margins are above the fiveyear average 1,400 1,200 1, kt PE PP PVC 1, PP Propylene PVC Naphtha EDC US$/t HDPE Naphtha Page 4

5 RELIANCE INDUSTRIES : RESULTS REVIEW Polyesters Performance Intermediates Production Volumes Intermediates Margins (Indicative Industry Spreads) PTA s expanded capacity was commissioned in FY16 MEG production was lower in due to a maintenance shutdown 2,000 1,500 1, kt PX PTA MEG PXNaptha PTA PX MEG Naptha US$/t Polyester Production Volumes Polyester Margins (Indicative Industry Spreads) PET s expanded capacity was commissioned in FY16 PET production was lower in due to a maintenance shutdown kt POY PSF PET POYPTAMEG PETPTAMEG US$/t PSFPTAMEG Page 5

6 RELIANCE INDUSTRIES : RESULTS REVIEW US Shale Performance Production Volumes And Gas Realisation Key Financials Trend Gas realisations went up sharply to USD 3.3/mmbtu 5.0 Production (RS) US$/mmbtu Gas price (US$/mmbtu) BCFe Revenues EBITDA EBITDA Margin (%) US$ mn 90% % The company is focussing on reducing capex and opex % 45% 30% % 0% Domestic E&P Performance PMT: Production Volumes And Gas Realisation KG: Production Volumes And Gas Realisation PMT Gas Vol (BCM) PM Gas Price ($/mmbtu) KG Gas Volume (BCM) KG Gas Price ($/mmbtu) The domestic gas price for KGD6 is reduced to USD 2.8/mmbtu for 2HFY T Gas Price ($/mmbtu) BCM $/mmbtu BCM $/mmbtu Page 6

7 RELIANCE INDUSTRIES : RESULTS REVIEW Retail Performance Key Financials Trend Store Additions And Performance Per Store Retail revenues in include ~Rs 25bn of auto fuel sales. Revenues are also boosted by sales of the LYF mobile and MIFI device (driven by free welcome offer) Revenues nonpetro EBITDA Margin (%) Rs bn Revenues Petro 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 4,000 3,500 3,000 2,500 2,000 1,500 1, No of stores Revenues nonpetro/store (Rs mn) Rs mn Page 7

8 RELIANCE INDUSTRIES : RESULTS REVIEW Petrochemical s growth in profitability was led by higher margins GRM was strong at USD 11.5/bbl. YoY decline in EBIT was owing to higher opex cost due to maintenance The change in estimates factors a lower depreciation and tax rate Quarterly Segmental Snapshot (Standalone) (Rs mn) YoY(%) QoQ (%) Segmental Revenues Petrochemicals Refining E & P (24.5) Gross Revenues EBIT Petrochemicals Refining (1.6) E & P (0.78) (2.42) (67.8) (1.25) (37.6) Total EBIT Margins (%) Petrochemicals (22) 15.5 (180) Refining (597) 11.5 (171) E & P (11.5) (26.9) 1,539 (20.1) 859 Change In Estimates (Rs bn) FY18E Old FY18E New % ch FY19E Old FY19E New % ch Revenue 2, , (0.1) 2, , (0.5) EBITDA PAT EPS (Rs/sh) Peer Valuation MCap CMP TP EPS (Rs/sh) P/E (x) P/BV (x) ROE (%) Rating* (Rs bn) (Rs/sh) (Rs/sh)* FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E Reliance Industries 4,608 1,414 NEU 1, ONGC 2, BUY Indian Oil Corp 2, BUY BPCL 1, NEU Gail India BUY HPCL BUY Petronet LNG BUY OIL India BUY Indraprastha Gas 148 1,058 BUY 1, , *As per previous published report Page 8

9 RELIANCE INDUSTRIES : RESULTS REVIEW Full benefits from petcoke gasification will accrue to refining operations in FY19E KG volumes will remain muted, and so will prices Chemical s additional capacity will come in phases in FY18E Assumptions FY13 FY14 FY15 FY16 FY17P FY18E FY19E Crude price (USD/bbl) INRUSD Refining Business GRM (USD/bbl) Crude Throughput (mmt) Upstream Business PMT Gas (BCF) Oil (mmbbl) PM Gas Price (USD/mmbtu) Tapti Gas Price (USD/mmbtu) KG Gas (mmscmd) Gas Price (USD/mmbtu) Petrochemicals Sales Volume (mmt) SOTP Valuation (Based On FY19E) Business EBITDA Value Value* Multiple (Rs bn) (Rs bn) (Rs/sh) Valuation Basis Petrochemicals , EV/EBITDA on FY19E Refining , EV/EBITDA on FY19E E & P PMT EV/EBIDTA on FY19E KG D6 Gas 11 4 NPV NEC NPV CBM 7 2 NPV Investment (US$ bn) Shale Gas x Inv as on Mar17 Retail x Inv as on Mar17 Telecom (RJio) , x Inv as on Mar17 Consolidated Net Debt 1.0 (1,070) (361) x as on Mar18 Value per share 4,070 1,375, * Valuation is based on 2.96bn shares (net of treasury shares) Page 9

10 RELIANCE INDUSTRIES : RESULTS REVIEW Standalone Income Statement (Rs bn) FY15 FY16 FY17 FY18E FY19E Revenues 3, , , , , Growth % (15.6) (29.1) Raw Material 2, , , , , Employee Cost Other Expenses EBITDA EBIDTA Margin (%) EBITDA Growth % Depreciation EBIT Other Income (Including EO Items) Interest PBT Tax RPAT EO (Loss) / Profit (Net Of Tax) APAT APAT Growth (%) AEPS AEPS Growth % Standalone Balance Sheet (Rs bn) FY15 FY16 FY17P FY18E FY19E SOURCES OF FUNDS Share Capital Reserves And Surplus 2, , , , , Total Equity 2, , , , , Longterm Debt Shortterm Debt Total Debt , , Deferred Tax Liability Longterm Provision TOTAL SOURCES OF FUNDS 3, , , , , APPLICATION OF FUNDS Net Block 1, , , , , Capital WIP , , , , LT Loans And Advances Total Noncurrent Investments , , , , Inventories Debtors Cash and Cash Equivalent , Other Current Assets Total Current Assets 1, , , , Creditors Other Current Liabilities & Provns Total Current Liabilities , , , Net Current Assets (7.27) TOTAL APPLICATION OF FUNDS 3, , , , , Page 10

11 RELIANCE INDUSTRIES : RESULTS REVIEW Standalone Cash Flow (Rs bn) FY15 FY16 FY17P FY18E FY19E Reported PBT Nonoperating & EO Items (72.71) (102.99) (87.09) (94.74) (104.77) Interest Expenses Depreciation Working Capital Change Tax Paid (60.82) (81.29) (93.52) (105.28) (119.21) OPERATING CASH FLOW ( a ) Capex (427.20) (213.22) (357.78) (132.00) (132.00) Free Cash Flow (FCF) (74.35) Investments (93.66) (505.72) Nonoperating Income Others INVESTING CASH FLOW ( b ) (417.65) (576.73) (270.69) (37.26) (27.23) Debt Issuance/(Repaid) (200.00) (200.00) Interest Expenses (23.67) (24.54) (27.23) (25.68) (20.06) FCFE (43.32) Share Capital Issuance Dividend (32.68) (72.59) (41.84) (54.73) (61.97) FINANCING CASH FLOW ( c ) 0.61 (46.18) (280.41) (282.03) NET CASH FLOW (a+b+c) (64.19) (182.09) EO Items, Others (14.50) Closing Cash & Equivalents , Standalone Key Ratios FY15 FY16 FY17P FY18E FY19E PROFITABILITY % EBITDA Margin EBIT Margin APAT Margin RoE Core RoCE RoCE EFFICIENCY Tax Rate % Fixed Asset Turnover (x) Inventory (days) Debtor (days) Other Current Assets (days) Payables (days) Other Current Liab & Provns (days) Cash Conversion Cycle (days) (18) (82) (95) (95) (93) Net Debt/EBITDA (x) (0.1) (0.7) Net D/E (0.0) (0.1) Interest Coverage PER SHARE DATA (Rs) EPS CEPS Dividend Book Value ,088.8 VALUATION P/E (x) P/Cash EPS (x) P/BV (x) EV/EBITDA (x) EV/Revenue (x) Dividend Yield (%) CFO/EV (%) FCFF/EV (%) (1.5) FCFE/M Cap (%) (0.9) Page 11

12 RELIANCE INDUSTRIES : RESULTS REVIEW RECOMMENDATION HISTORY Reliance Inds 1,500 1,400 1,300 1,200 1,100 TP Date CMP Reco Target 25Apr16 1,039 BUY 1,155 18Jul16 1,012 BUY 1,155 21Oct16 1,088 BUY 1,225 17Jan17 1,076 BUY 1,225 13Apr17 1,354 NEU 1,225 25Apr17 1,414 NEU 1,375 1, Apr16 May16 Jun16 Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 Jan17 Feb17 Mar17 Apr17 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver ()10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than ()10% returns over the next 12 month period Page 12

13 RELIANCE INDUSTRIES : RESULTS REVIEW Disclosure: We, Satish Mishra, PGDM, & Deepak Kolhe, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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