Reliance Industries BUY

Transcription

1 15 October 2017 India Oil and Gas Company Update Reliance Industries BUY 2Q18: RJIO surprises; standalone results broadly in-line RIL reported standalone 2Q18 EBITDA at INR 129bn (+12%QoQ/+23%YoY) 5% above JMFe. The marginal beat in EBITDA was driven by (i) higher Petchem EBIT at INR 49bn (+23%QoQ/+41%YoY) vs JMFe of INR 38bn, and (ii) Lower than estimated loss in E&P at INR 960mn (vs JMfe of a loss of INR 1.7bn). Tax rate was reported higher at 28% (vs JMfe of 23%) thereby resulting in a PAT of INR 82bn (flat QoQ/+7%YoY) missing JMFe by 4%. All other parameters were broadly in-line. GRMs were reported at $12/bbl vs JMfe of $12.25/bbl. In the ensuing analyst meet, RIL continued to retain a postive outlook on Refining and Petchem on back of lack of capacity additions. We increase TP to INR 900 (from INR 825 earlier) and maintain BUY on the stock. Segmental performance: (i) Refining EBIT came in at INR65bn (+3% QoQ/+10% YoY/inline JMFe) with GRMs being reported at $12/bbl (vs JMFe of $12.25/bbl). Throughput came in-line at 18.1 mnt (ii) Petchem standalone EBIT was reported at INR 49bn (+23%QoQ/+42%YoY) beating JMFe by 30% aided by higher speads. (iii) RIL s KG gas production decreased during 2Q to 5.45 mmscmd and loss at EBIT level for the E&P segment was reported at (R960mn). Analyst meet takeaways: At the ensuing analyst meet, RIL stated that they expect refinery capacity addition to continue to lag the demand growth on back of economic growth. Specifically, gasoil and gasoline demand would be strong. Additionally, with light oil availability having improved, light-heavy spread would be under pressure. On Petchem, RIL believes that there could be some delay in the start-up of new ethylene capacities in US which could support cracker margins. Additionally, a disruption in Middle east supplies of PET, restart of PTA plants in China could support PX demand and MEG supplies could also remain strong. RJIO update: 2QFY18 revenue was INR 61.5bn; adding back interconnect income, underlying revenue was INR 65.5bn, which implies an estimated 13-14% revenue market share [RMS] for 2Q. Jio operationalised its 4G mobile assets starting 1st July; these amounted to c.71% of its INR 2076bn gross fixed asset base as of end-2q. Thanks to significant opex capitalisation (estimated at INR 10bn) pertaining to non-mobile asssets [Enterprise, FTTH, IOT], and an unconventional Depreciation & Amortisation policy [non- SLM, back-ended], Jio was EBIT positive in 2Q and reported a modest INR 2.7bn net loss. We reckon a more conventional accounting treatment of mobile network opex, D&A and interest costs, may have resulted in a net loss of INR 15-16bn in 2Q. Mehul Thanawala mehul.thanawala@jmfl.com Tel: (91 22) Pramod Krishna pramod.krishna@jmfl.com Tel: (91 22) Recommendation and Price Target Current Reco. BUY Previous Reco. BUY Current Price Target (12M) 900 Upside/(Downside) 2.7% Previous Price Target 825 Change 9.1% Key Data RIL IN Current Market Price Market cap (bn) Rs876 Rs5,700.3/US$87.8 Free Float 43% Shares in issue (mn) 6,334.0 Diluted share (mn) 6, mon avg daily val (mn) Rs7,109.6/US$ week range 891/465 Sensex/Nifty 32,433/10,167 Rs/US$ 64.9 Price Performance % 1M 6M 12M Absolute Relative* * To the BSE Sensex Increase TP; Maintain BUY: (i) Driven by the IUC cut, our DCF-derived equity value for Jio has increased to INR 1450bn from INR 1200bn previously, (ii) We roll forward to Dec 18 to arrive at a TP of INR 900 (from INR 825 earlier). We continue to believe that over the next one year most of the capex in refining and petchem will come to an end and will start contributing to the revenues. The key risk to our call is lower commodity prices Financial Summary (Rs mn) Net Sales 23,31,580 24,20,250 25,56,439 26,26,599 27,73,475 Sales Growth (%) EBITDA 3,93,470 4,32,560 4,52,397 4,73,965 5,03,991 EBITDA Margin (%) Adjusted Net Profit 2,73,840 3,14,250 3,04,117 2,77,162 2,79,425 Diluted EPS (INR) Diluted EPS Growth (%) ROIC (%) ROE (%) P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield (%) Source: Company data, JM Financial. Note: Valuations as of 13/Oct/2017 JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital IQ and FactSet Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. JM Financial Institutional Securities Limited

2 Q2FY18 Financial highlights Exhibit 1. Quarterly summary Sep-17 Sep-17 Variance Jun-17 QoQ Sep-16 YoY Actual Estimate Net Sales INR mn 6,85,320 6,68, % 6,42, % 5,95, % Total Expense INR mn 5,55,490 5,45, % 5,26, % 4,90, % EBIDTA INR mn 1,29,830 1,23, % 1,15, % 1,05, % EBIDTA margin % 18.9% 18.4% 18.0% 17.7% EBIT INR mn 1,07,150 1,00, % 94, % 85, % PBT INR mn 1,14,580 1,10, % 1,05, % 1,01, % PAT INR mn 82,650 85, % 81, % 77, % Other comprehensive Income INR mn -8,640 0 NA -1,880 NA 6,540 NA PAT after OCI INR mn 74,010 85, % 80, % 83, % PAT margin % 10.8% 12.8% 12.5% 14.0% EPS % % % GRM % % % Exhibit 2. Segmental trends Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18 QoQ YoY Revenue Petchem INR mn 1,94,090 2,12,930 2,16,900 2,52,310 2,40,830 2,68,260 11% 26% Refining INR mn 4,89,460 5,18,380 5,32,150 6,38,630 5,89,020 5,93,240 1% 14% Oil & Gas INR mn 7,830 7,010 6,230 6,800 5,820 7,600 31% 8% Others INR mn 2,340 3,050 2,890 3,460 3,290 3,110-5% 2% EBIT Petchem INR mn 29,010 34,640 33,590 34,540 39,840 49,130 23% 42% Refining INR mn 65,810 59,010 61,270 62,620 63,750 65,320 2% 11% Oil & Gas INR mn , , NA NA Others INR mn ,140 1,190 1,320 1,230-7% 37% EBIT margin Petchem % 15% 16% 15% 14% 17% 18% Refining % 13% 11% 12% 10% 11% 11% Oil & Gas % 6% 3% -20% -11% -40% -13% Others % 42% 30% 39% 34% 40% 40% JM Financial Institutional Securities Limited Page 2

3 Q2 FY11 Q2 FY12 Q2 FY13 Q2 FY14 Q2 FY15 Q2 FY16 Q2 FY17 Q2 FY18 Reliance Industries 15 October 2017 Refining business: Refining EBIT came in at INR 65bn (+3% QoQ/+10% YoY/in-line JMFe) with GRMs being reported at $12/bbl (vs JMFe of $12.25/bbl). Throughput came in-line at 18.1 mnt Exhibit 3. QoQ trend in GRMs Refining EBIT GRMs (RHS) 70,000 60,000 50,000 40,000 30,000 20,000 10, (0.3) At the analyst meet, management stated that improved product cracks led by demand growth and supply disruptions helped in improving refining margin despite narrow lightheavy differential for crude oil and widening of Brent-Dubai differential. Average refinery utilization rate was at 86.3% in North America, 89.2% in Europe and 85.4% in Asia. Refinery utilization rates in North America remained at elevated levels but were significantly impacted by disruptions due to hurricane Harvey. Utilization levels in Europe were also seasonally higher in the quarter supported by disruptions in North America and unplanned outages. Utilization in Asia was marginally lower Q-o-Q on account of capacity addition in China. During 2QFY18, the benchmark Singapore complex margin averaged $ 8.3/ bbl as compared to $6.4/ bbl in 1Q FY18 and $ 5.1/ bbl in 2QFY17. Margins were higher due to improvement in product cracks across the board, receding product stocks in key regions and supply disruptions in Americas. Exhibit 4. Refining Key highlights Highlights: Sep-17 Sep-17 Variance Jun-17 QoQ Sep-16 YoY Operational: Actual Estimate Actual Actual GRM $/BBL % % % Total Refinery throughput Mn. Ton 18,100 17, % 17, % 18, % Refining segment revenue INR. Mn. 5,93,240 5,25, % 5,89, % 5,18, % Refining Segment EBIT INR. Mn. 65,320 64, % 63, % 59, % JM Financial Institutional Securities Limited Page 3

4 Petrochemicals business: Petchem standalone EBIT was reported at INR 49bn (+23%QoQ/+42%YoY) beating JMFe by 30% aided by higher spreads. While Polymer production rose 21%QoQ to 1180mnT, polyester production was up 2%QoQ to 600mnT and intermediate production was up 7%QoQ to 2228mnT Exhibit 5. Petchem: key highlights Highlights: Sep-17 Sep-17 Variance Jun-17 QoQ Sep-16 YoY Operational: Actual Estimate Actual Actual Polymer Production (PP, PE, PVC) KT 11,80,000 14,48, % 9,78, % 11,86, % Intemediate Production (PX, PTA, MEG) KT 22,28,000 22,70, % 20,91, % 17,39, % Polyester Production (PFY, PSF, PET) KT 6,00,000 7,07, % 5,89, % 5,94, % Petrochemicals Segment Revenue INR. Mn. 2,68,260 2,50, % 2,40, % 2,12, % Petrochemicals Segment EBIT INR. Mn. 49,130 38, % 39, % 34, % During the quarter, PP and PVC prices gained by 4% and 2% respectively while HDPE and LLDPE prices were stable. However, PE margins were marginally lower ($ 669/MT, down 5% Q-o-Q) due to strengthening of naphtha prices. PP margins remained firm ($ 298/MT, up 1% Q-o-Q) on account of supply concerns and firm feedstock prices. PVC margins were at 5 years high ($ 602/MT, up 14% Q-o-Q) due to drop in EDC prices in line with availability of low price Chlorine caused by surge in Caustic price. While downstream businesses were aligning themselves to the new GST tax regime, July 17 witnessed slowdown in business transactions and end product movement. However, from August 17 onwards the demand revived ahead of festive season. On Y-o-Y basis, domestic polymer demand was higher by 3% during 2QFY18. Reliance has started operations of its new ROGC cracker, MEG and LLDPE plants at Jamnagar. Currently, these plants are under stabilization JM Financial Institutional Securities Limited Page 4

5 Exploration and Production: RIL s KG gas production decreased during 2Q to 5.45 mmscmd and loss at EBIT level for the E&P segment was reported at (R960mn). Exhibit 6. Oil & Gas : Key highlights Highlights: Sep-17 Sep-17 Variance Jun-17 QoQ Sep-16 YoY Operational: Actual Estimate Actual Actual KG total Gas production mmscmd % % % WI production KT % 3.9-5% % Average E& P Revenue $/boe % % % Oil & Gas Segment Revenue INR. Mn. 7,600 7, % 5, % 7, % Oil & Gas Segment EBIT INR. Mn , % -2, % % KG-D6 block produced 0.18 MMBBL of crude oil and 17.7 BCF of natural gas in 2QFY18, a reduction of 31% and 30% respectively on a Y-o-Y basis. Condensate production in 2Q FY18 was at Fall in oil and gas production was mainly on account of natural decline coupled with water and sand ingress resulting in shut-in of wells R-Cluster Development: Awards for long-leads have commenced. Bid evaluation and negotiations for various other contracts are in advanced stages. MJ: Field Development Plan (FDP) is planned for submission in 2H FY18. Satellite Cluster: To enhance economic viability, integrated development of Satellite and other Satellite fields has been envisaged. FDPs for both fields targeted for submission in 2H FY18. CBM - Following open transparent bidding process, the price discovered for the period up to Sept 2017 was $4.50 /mmbtu (GCV). Post market feedback and review from initial two rounds of bidding, RIL initiated a term price bidding for a Gas Sale and Purchase Agreement (GSPA) till March The bidding process has been concluded and RIL emerged as the highest bidder JM Financial Institutional Securities Limited Page 5

6 Telecom: 2QFY18 revenue was INR 61.5bn; adding back interconnect income, underlying revenue was INR 65.5bn, which implies an estimated 13-14% revenue market share [RMS] for 2Q. Jio operationalised its 4G mobile assets starting 1st July; these amounted to c.71% of its INR 2076bn gross fixed asset base as of end-2q. Thanks to significant opex capitalisation (estimated at INR 10bn) pertaining to non-mobile asssets [Enterprise, FTTH, IOT], and an unconventional Depreciation & Amortisation policy [non-slm, back-ended], Jio was EBIT positive in 2Q and reported a modest INR 2.7bn net loss. We reckon a more conventional accounting treatment of mobile network opex, D&A and interest costs, may have resulted in a net loss of INR 15-16bn in 2Q. We expect Jio to swing to profits in 3Q, driven by the 57% IUC cut. Including capitalised opex and interest, 2Q capex was INR 75bn, lower than INR180bn reported for 1Q. Driven by the IUC cut and rollover to Dec-18, our DCF-derived equity value for Jio has increased to INR 1450bn from INR 1200bn previously. At the analyst meet RIL clarified that it now has c mn subscribers (131 mn average for the quarter). The ARPU was INR. 156 /month. The data traffic on the network is now close to 10 GB/day while the voice traffic is 626 minutes /month. Network matrix have also improved with call drop rate at <0.4%. RIL also claimed 100% network availability. RIL started booking the telecom revenue only from the current quarter while it had received revenue in the previous quarter under various plans. Therefore, proportionate income was booked in the current quarter. Subsequently, RIL has increased the tariff slightly. RIL also stated that the JIO feature phone bookings will re-open shortly. The demand was strong and they will reopen bookings once the supply chain has coped up. Retail business: Retail business came in with revenues/ebit at INR 146bn/INR 3.34bn respectively, thereby implying at growth of +81% YoY/+27%QoQ in sales and+106%yoy/+14%qoq in EBIT Exhibit 7. Organized retail revenues Exhibit 8. Number of retail stores Anticipating tax revisions as a result of GST implementation, consumes preponed discretionary spend on many categories. There were supply disruptions for a short period as manufacturers were clearing old inventory. Advance inventory planning and strong vendor relationships helped tackle stock-outs during the GST implementation period mitigating revenue loss JM Financial Institutional Securities Limited Page 6

7 Valuations Exhibit 9. RIL SOTP Particular Multiple Value (INR ) Methodology Exploration and Production Based on 2P Reserves: EV (INR mn) EV/boe ($) KG-D6 (D1, D3 and MA) 1,19, DCF with WACC of 11% CBM Valuation 72, DCF with WACC of 11% Other Producing Assets Panna Mukta 3, Tapti Base Case E&P Valuation 1,95, Others Shale gas JV 10 Adjusted for the debt taken in individual subsidiaries E&P Valuation 1,95, Refining EBITDA (INR mn) EV/EBITDA FY19E EBITDA 2,83, x EV / EBITDA on FY19E EBITDA Petrochemicals EBITDA (INR mn) EV/EBITDA FY19E EBITDA 2,37, x EV / EBITDA on FY19E EBITDA Others Book Value P/B Retail 56, SEZ 25, Investment in Telecom 7,86, Other long-term investments 6,94, Treasury stock Net Debt 93 Net debt as on Mar'18 Value Mar'19 60,19, Value Dec' JM Financial Institutional Securities Limited Page 7

8 Financial Tables (Standalone) Income Statement (Rs mn) Net Sales 23,31,580 24,20,250 25,56,439 26,26,599 27,73,475 Sales Growth -29.1% 3.8% 5.6% 2.7% 5.6% Other Operating Income Total Revenue 23,31,580 24,20,250 25,56,439 26,26,599 27,73,475 Cost of Goods Sold/Op. Exp 16,11,810 16,45,720 16,87,529 16,73,638 17,56,307 Personnel Cost 42,620 44,340 50,991 58,640 62,744 Other Expenses 2,83,680 2,97,630 3,65,522 4,20,356 4,50,433 EBITDA 3,93,470 4,32,560 4,52,397 4,73,965 5,03,991 EBITDA Margin 16.9% 17.9% 17.7% 18.0% 18.2% EBITDA Growth 24.5% 9.9% 4.6% 4.8% 6.3% Depn. & Amort. 85,900 84,650 1,19,251 1,50,320 1,68,010 EBIT 3,07,570 3,47,910 3,33,146 3,23,645 3,35,981 Other Income 78,210 87,090 79,098 75,919 84,435 Finance Cost 25,620 27,230 24,839 34,876 52,751 PBT before Excep. & Forex 3,60,160 4,07,770 3,87,405 3,64,687 3,67,665 Excep. & Forex Inc./Loss(-) PBT 3,60,160 4,07,770 3,87,405 3,64,687 3,67,665 Taxes 86,320 93,520 83,288 87,525 88,239 Extraordinary Inc./Loss(-) Assoc. Profit/Min. Int.(-) Reported Net Profit 2,73,840 3,14,250 3,04,117 2,77,162 2,79,425 Adjusted Net Profit 2,73,840 3,14,250 3,04,117 2,77,162 2,79,425 Net Margin 11.7% 13.0% 11.9% 10.6% 10.1% Diluted Share Cap. (mn) 6, , , , ,486.0 Diluted EPS (INR) Diluted EPS Growth 20.5% 14.8% -3.2% -8.9% 0.8% Total Dividend + Tax 41,640 39,160 46,254 42,155 42,499 Dividend Per Share (INR) Cash Flow Statement (Rs mn) Profit before Tax 3,60,160 4,07,770 3,87,405 3,64,687 3,67,665 Depn. & Amort. 1,31,710 81,050 1,19,251 1,50,320 1,68,010 Net Interest Exp. / Inc. (-) -78,210-87,090-79,098-75,919-84,435 Inc (-) / Dec in WCap. 5,60,588 1,46,160-1,32,824 4,768 5,232 Others Taxes Paid -78,010-83,330-73,607-80,231-80,886 Operating Cash Flow 8,96,238 4,64,560 2,21,128 3,63,625 3,75,585 Capex -8,13,030-3,69,759-2,78,845-6,16,775-2,00,047 Free Cash Flow 83,208 94,801-57,717-2,53,149 1,75,538 Inc (-) / Dec in Investments -4,46,770-3,52,000-99,077-59,624-33,863 Others Investing Cash Flow -12,59,800-7,21,759-3,77,922-6,76,399-2,33,911 Inc / Dec (-) in Capital Dividend + Tax thereon -72,590-39,160-46,254-42,155-42,499 Inc / Dec (-) in Loans 31,790 89,830 1,15,000 3,50,000-1,00,000 Others 3,57,623 1,55,080 79,098 75,919 84,435 Financing Cash Flow 3,16,774 2,05,822 1,47,883 3,83,764-58,064 Inc / Dec (-) in Cash -46,789-51,377-8,911 70,991 83,610 Opening Cash Balance 1,15,710 68,920 17,540 8,629 79,619 Closing Cash Balance 68,921 17,543 8,629 79,619 1,63,230 Balance Sheet (Rs mn) Shareholders Fund 25,39,981 28,83,131 31,41,034 33,76,041 36,12,968 Share Capital 32,480 32,550 64,940 64,940 64,940 Reserves & Surplus 25,07,501 28,50,581 30,76,094 33,11,101 35,48,028 Preference Share Capital Minority Interest Total Loans 9,23,200 10,13,030 11,28,030 14,78,030 13,78,030 Def. Tax Liab. / Assets (-) 2,37,470 2,47,660 2,57,341 2,64,635 2,71,988 Total - Equity & Liab. 37,00,651 41,43,821 45,26,405 51,18,706 52,62,986 Net Fixed Assets 25,84,481 28,73,190 30,32,783 34,99,238 35,31,275 Gross Fixed Assets 28,22,131 29,59,050 36,16,955 41,83,729 43,33,777 Intangible Assets Less: Depn. & Amort. 13,46,700 14,27,750 15,47,001 16,97,322 18,65,331 Capital WIP 11,09,050 13,41,890 9,62,830 10,12,830 10,62,830 Investments 15,72,500 19,24,500 20,23,577 20,83,202 21,17,065 Current Assets 6,59,760 6,69,770 6,20,361 6,93,509 7,97,331 Inventories 2,80,340 3,40,180 3,52,163 3,52,734 3,69,796 Sundry Debtors 34,950 54,720 57,799 59,385 62,535 Cash & Bank Balances 68,920 17,540 8,629 79,619 1,63,230 Loans & Advances 1,67,850 1,53,180 1,53,180 1,53,180 1,53,180 Other Current Assets 1,07,700 1,04,150 48,590 48,590 48,590 Current Liab. & Prov. 11,16,090 13,23,640 11,50,318 11,57,243 11,82,686 Current Liabilities 10,93,730 12,89,780 11,16,458 11,23,383 11,48,826 Provisions & Others 22,360 33,860 33,860 33,860 33,860 Net Current Assets -4,56,330-6,53,870-5,29,957-4,63,734-3,85,356 Total Assets 37,00,651 41,43,820 45,26,404 51,18,705 52,62,985 Dupont Analysis Net Margin 11.7% 13.0% 11.9% 10.6% 10.1% Asset Turnover (x) Leverage Factor (x) RoE 11.6% 11.6% 10.1% 8.5% 8.0% Key Ratios BV/Share (INR) ROIC 12.9% 14.2% 12.5% 10.0% 9.5% ROE 11.6% 11.6% 10.1% 8.5% 8.0% Net Debt/Equity (x) P/E (x) P/B (x) EV/EBITDA (x) EV/Sales (x) Debtor days Inventory days Creditor days JM Financial Institutional Securities Limited Page 8

9 APPENDIX I JM Financial Institutional Securities Limited Corporate Identity Number: U65192MH1995PLC Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd. SEBI Registration Nos.: BSE - INZ , NSE - INZ and MSEI - INZ , Research Analyst INH Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai , India. Board: Fax: jmfinancial.research@jmfl.com Compliance Officer: Mr. Sunny Shah Tel: sunny.shah@jmfl.com Definition of ratings Rating Meaning Buy Total expected returns of more than 15%. Total expected return includes dividend yields. Hold Price expected to move in the range of 10% downside to 15% upside from the current market price. Sell Price expected to move downwards by more than 10% Research Analyst(s) Certification The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select recipient of this report. 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The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations, 2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the company(ies) covered under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the time of publication of this report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report. While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. 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