Reliance Industries Ltd.

Transcription

1 Change in Estimates Rating Target Reliance Industries Ltd. Strong performance continues BUY Sector: Oil & Gas Sector View: Neutral Analyst: Prayesh Jain Stock Data Sensex: 24,48 52 Week h/l (Rs): 19 / 796 Market cap (Rscr) : 338,44 6m Avg t/o (Rscr): 343 Bloomberg code: RIL IS BSE code: 5325 NSE code: RELIANCE FV (Rs): 1 Div yield (%): 1. Prices as on Jan 19, 216 Shareholding Pattern Mar 15 June 15 Sep 15 Promoters FII+DII Others Share Price Trend RELIANCE Sensex 4 Jan 15 May 15 Sep 15 Jan 16 January 2, 216 Result Update CMP: Rs1,43 1 yr Target: Rs1,2 Upside: 15.1% Reliance Industries performance was ahead of estimates on the back of an strong performance from the refining segment OPM improved 917bps yoy and 199bps qoq to 18.2% in line with our expectations; yoy increase was led by 46bps and 841bps rise in petchem and refining segment EBIT margins respectively US$11.5/bbl GRMs was tad higher than our estimates PAT at Rs. 7,218cr was higher than our estimates due to better than expected refining and petchem performance and higher other income Raise FY16 and FY17 estimates and maintain BUY rating with higher 1 year target price of Rs1,2 Result table (Rs. cr) % yoy % qoq Net sales 56,567 8,196 (29.5) 6,817 (7.) Material costs (37,682) (63,45) (4.6) (41,933) (1.1) Purchases (949) (1,951) (51.4) (1,134) (16.3) Personnel costs (1,91) (832) 31.1 (939) 16.2 Other overheads (6,573) (6,755) (2.7) (6,978) (5.8) Operating profit 1,272 7, , OPM (%) bps bps Depreciation (2,45) (2,15) 14.3 (2,372) 1.4 Interest (69) (881) (3.9) (694) (12.2) Other income 2,289 2,42 (4.7) 1, PBT 9,547 6, , Tax (2,329) (1,539) 51.3 (1,823) 27.8 Effective tax rate (%) Adjusted PAT 7,218 5, , Adj. PAT margin (%) bps bps Ann. EPS (Rs) Segmental performance Revenues (Rs. cr) % yoy % qoq Petrochemical 18,31 21,36 (15.4) 19,851 (9.2) Refining 49,552 73,152 (32.3) 51,265 (3.3) Oil and gas 992 1,347 (26.4) 1,166 (14.9) EBIT margins (%) bps yoy bps qoq Petrochemical Refining Oil and gas (1,589) 4.8 (87) Revenue contribution (%) bps yoy bps qoq Petrochemical (116) Refining (46) Oil and gas (17) EBIT contribution (%) bps yoy bps qoq Petrochemical (966) 31.3 (269) Refining , Oil and gas (422).7 (27) This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices, estimates and views on sectors and markets (Read the complete disclaimer at the back of this report)

2 Reliance Industries Ltd () Performance summary Particulars Units yoy qoq E Deviation Revenue Rs crore 56,567 8,196 6, % 7.% 58, % Operating profit Rs crore 1,272 7,28 9, % 4.5% 1,74 4.% OPM % (6) PAT Rs crore 7,218 5,85 6, % 1.% 7,72 2.1% Refining Revenue Rs crore 49,552 73,152 51, % 3.3% 49,87.9% EBIT Rs crore 6,333 3,199 5, % 17.% 6, % Throughput Mn tons % 5.3% % GRM US$/bbl % 8.5% % EBIT Margin % Petchem Revenue Rs crore 18,31 21,36 19, % 9.2% 2, % EBIT Rs crore 2,592 2,197 2,52 18.% 2.9% 2, % Volume Mn tons % 3.2% % EBIT Margin % Oil & Gas Revenue Rs crore 992 1,347 1, % 14.9% 1,1 9.8% EBIT Rs crore % 3.4% 5 22.% KG D6 mmscmd % 6.8% % EBIT Margin % (1,589) (87) 4.5 (61) Other income Rs crore 2,289 2,42 1, % 41.6% 1,6 43.1% Interest Rs crore (69) (881) (694) 3.9% 12.2% (72) 15.4% Depreciation Rs crore (2,45) (2,15) (2,372) 14.3% 1.4% (2,4).2% Tax rate % Refining segment: Outperformance to benchmark continues RIL reported GRMs of US$11.5/bbl in as against US$7.3/bbl in and US$1.6/bbl in Q2 FY16. The GRMs were slightly better than our expectations. Benchmark Singapore GRMs saw a sequential increase from US$6.3/bbl in to US8/bbl in. The growth was driven by strength in Naphtha, Gasoil, Jet Kero and Fuel Oil spreads. RIL having nil fuel oil production gained relatively less when compared to the benchmark. Resultantly, the spreads between Singapore and RIL s GRMs narrowed on a sequential basis from US$4.3/bbl in to US$3.5/bbl in. However, the spread was substantially higher when compared with US$1/bbl in. Low energy costs considering sharp fall in LNG prices also helped company s performance. Other reasons included better sourcing of crude wherein the company shifted nearly 1% of the crude slate from Brent linked crude oils to Dubai based crude oils to take advantage of favorable differentials. In terms of marketing too, the company was able to place in products at geographies with higher margins. Revenue for the segment was lower by 32.3% yoy owing to lower product prices. EBIT margins for the segment were at 12.8%, jumped from 4.4% in and 1.6% in. Page 2 of 14

3 Reliance Industries Ltd () Trend in RIL s GRMs Trend in throughput US$/bbl RIL GRM Singapore GRM Mn tons Other key highlights Low oil prices and demand for light distillates particularly transportation fuels continue to fuel demand Gasoline demand growth has remained strong in India and China driven by strong record auto sales. Gasoil demand has been strong in Europe and India. Jet kero demand remained strong on the back of increasing miles travelled. Large benefits continue to exist for petcoke gasification project at current LNG prices of US$7.5/mmbtu and pet coke price of $1.5/mmbtu. Highest ever quarterly production of ULSD at 4.2mn tons was achieved in line with strategy to maximize ULSD in view of better realization against 5 ppm diesel The company has opened 762 retail outlets so far and can boast of the largest average throughout per outlet of 2KLPM and aims to double it Domestic marketing volumes Retail & Bulk reached 2.3 Million KLPA level on exit rate basis in Dec 15 With regards to the petcoke gasification project, utilities systems are at start up stage and gasifiers are expected to commence operations from the H2 of CY16. The company has maintained its guidance of US$2.5/bbl to GRM gains from the project in spite of current difficult environment. Outlook for GRMs Global oil demand is expected to grow at mb/d in 216 Oil price outlook continues to look weak Lower price environment to provide sustainable demand growth for transportation fuels Iranian crude availability in the market No new major refineries expected in next few years Old refineries in OECD countries continue to run at top of utilization, increasing unscheduled shutdown risks Current strength in light distillates (gasoline/ naphtha) expected to continue for next few quarters Middle distillates supplies continue to be high, but low flat price expected to support demand Page 3 of 14

4 Reliance Industries Ltd () Petrochemical segment: better than expected show During, petrochemical segment revenues were lower 15.4% yoy and 9.5% qoq. Volumes were higher by 2.8% yoy and 3.2% qoq as the company started production at new facilities. However, realizations witnessed declines of 29.9% yoy and 12% qoq in line with sharp correction seen in crude oil prices. However, the declines were much lower than the fall in crude prices when seen on yoy basis. Sequentially spreads were lower for most products in absolute terms but were strong in percentage terms. EBIT margin for the segment at 14.4% was higher by 46bps yoy and 168bps qoq. This performance was better than our expectations. Trend in petrochemical prices Rs/kg PE PP Rs/kg POY PSF Rs/kg PTA MEG Source: Company Trend in petrochemical deltas US$/ton HDPE Naphtha 4 3 US$/ton PP Propylene US$/ton PVC EDC Source: Company 5 4 US$/ton PSF PTA MEG 3 25 US$/ton PET PTA MEG 6 5 US$/ton POY PTA MEG Source: Company Page 4 of 14

5 Reliance Industries Ltd () Petchem revenues fall on lower realizations EBIT margins for petchem improve sequentially 3, 25, 2, 15, 1, 5, Rs. cr Revenues yoy growth 3% 25% 2% 15% 1% 5% % 5% 1% 15% 2% 25% 3, 2,5 2, 1,5 1, 5 Rs. cr EBIT EBIT Margins 16.% 14.% 12.% 1.% 8.% 6.% 4.% 2.%.% Other key highlights Ethylene margins remained strong as Indian demand was strong with an increase of 15% in 9 months. Ethylene up cycle is expected to continue till 218 when US shale based crackers are likely to come up. Asian crackers becoming competitive v/s middle east players Ethane plant is expected to commission by the end of 216 and ships are likely to arrive at the start 217. ROGC is expected to start operations by Q3 FY17. PP and PE deltas were very strong and were substantially above historic averages. PVC spreads were weak due to seasonality. Debottlenecking of PP capacity of 6ktpa helped volume growth India is outperforming China substantially in terms of demand growth. Low oil prices have helped sustainability of naphtha based crackers. The company has maintained its guidance of ROGC earning a top quartile performance margin when compared globally. Inventory management has also helped the margins at a time when global market is de stocking. This should help when re stocking happens. Polymer Outlook Sustained lower oil prices continue to support cost competitiveness of Asian naphtha based crackers Delays in incremental CTO/MTO units and sub par utilization of PDH units likely to support margins Domestic polymer demand to remain healthy with projected 7 8% growth in Indian economy Due to slowdown in China, major global producers are likely to shift their focus to India as a export market PE demand expected to grow by 9 1% annually over the next five years Incremental supplies to help bridge deficit and meet robust growth in demand Elastomers Outlook Globally lower fuel prices leading to higher miles driven will provide impetus to tyre demand With no new planned capacities of E SBR in pipeline, global operating rates likely to improve Indian synthetic rubber market projected to be the fastest growing globally at ~8 1% Page 5 of 14

6 Reliance Industries Ltd () FY16 SBR demand expected to grow 3% globally and by 7 8% in India FY16 PBR demand expected to grow 3% globally and by 8% in India RIL strengthening its commitment to the domestic customers with focus on Customer Centricity RIL has largest distribution network in the country for any elastomer supplier New grades for production of green tyres Oil extended grades adhering to European standards World class Elastomers Customer Service Centre (ECSC) providing technical services and application technology development Extensive support and collaborative work in conveyor belt, tread rubber, solid tires, bicycle tire and tubes and for other rubber goods to expand SBR consumption Polyester chain outlook Polyester demand from western world continues to be robust Polyester to be further affordable and competitive at lower price, aiding demand With lower PX capacity growth in near term, feed stock availability could be constrained due to higher demand from Gasoline PTA production likely to be rationalized due to financial stress in the industry MEG stock building to continue, signaling revival of demand in near term with no new capacity addition With commissioning of PET, PFY and PTA capacities and upcoming PX and MEG capacity, RIL to benefit from integration, stable chain deltas E&P segment KG D6 gas production at 1.9mmscmd represented a fall of 2.5bcf on a qoq basis on the back of natural decline. Panna Mukta fields produced 1.6 million barrels of crude oil and 16.8 BCF of natural gas in Q3 FY16 a reduction of 12% yoy and 9.4% yoy respectively. The decline was on the back of natural decline and due to shutdown of PC platform due to technical issues in riser. Tapti fields produced.4 million barrels of condensate and.76 BCF of natural gas in reduction of 15% yoy and 75% yoy respectively. The decrease is due to natural decline. Production from Tapti field is expected to cease during Q4 FY16. Revenues from the segment (standalone) were lower by 26.4% yoy owing to fall in production, steep fall in crude oil prices and were partially offset by rupee depreciation. EBIT margins for the segment were at 3.9% as compared to 19.8% in and 4.8% in. Trend in KG D6 gas production Trend EBIT margins of E&P segment mmscmd KG D6 production 1,4 1,2 1, Rs. cr EBIT EBIT Margin 5.% 45.% 4.% 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% Page 6 of 14

7 Reliance Industries Ltd () Update on E&P fields NEC 25 Drilling and DST Program in D32 discovery completed Revised DOC under preparation NIKO withdrew from NEC 25 PSC; its 1% share is under assignment to RIL and BP CB 1 7 Discoveries FDP submitted to Management Committee (MC) Phase II exploration land acquisition for exploratory well sites in progress Panna Mukta and Tapti Out of 5 Workovers planned in 2H FY16, 2 have been completed during the Quarter Drilling of 6 MB wells completed in Nov 15. All wells flowing ~ 25 BOPD of oil Wells still flowing from Tapti field Cessation of production expected shortly Early abandonment activities for Tapti commenced CBM Phase 1 development nearing completion First Gas expected shortly Gas Gathering Station (GGS 11) Mechanical completion completed and RFSU is expected shortly GGS12 nearing mechanical completion Drilling and completion of GGS 11 wells is completed and more than 8% of production holes are drilled in GGS 12 Four WGS linked to GGS 11 completed; work in progress for four WGSs in GGS 12 Infield pipeline laying for GGS 11 completed GGS 12 pipeline laying is under progress Shahdol Phulpur Pipeline Expected to get commissioned by 4Q FY16 Pre commissioning under progress Update on shale gas assets For, RIL s revenues and EBIDTA from shale gas business were at US$11mn and US$58mn While production volumes were higher by 6% yoy, revenues were lower by 46.6% yoy owing to 47% yoy fall in realizations Capex for the quarter was at US$16mn taking the cumulative investments to over US$8.7bn across all JVs Page 7 of 14

8 Reliance Industries Ltd () Trend in RIL s revenue and EBIDTA from Shale gas 3 US$ mn Revenue EBIDTA US$ mn Consolidated results weak shale gas performance impacts profitability Financial results (Rs m) % yoy % qoq Net sales 68,261 93,528 (27.) 7,91 (3.7) Material costs (39,547) (68,43) (42.2) (42,547) (7.1) Purchases (6,771) (5,5) 34.1 (6,94) (1.9) Personnel costs (2,26) (1,548) 3.9 (1,786) 13.4 Other overheads (8,549) (9,811) (12.9) (8,96) (4.6) Operating profit 11,368 8, , OPM (%) bps bps Depreciation (3,133) (2,954) 6.1 (3,171) (1.2) Interest (921) (1,137) (19.) (972) (5.2) Other income 2,426 2, , PBT 9,74 6, , Tax (2,383) (1,747) 36.4 (1,784) 33.6 Effective tax rate (%) Other provisions / minority etc (67) 65 (23.1) 95 (17.5) Adjusted PAT 7,29 5, , Adj. PAT margin (%) bps bps Extra ordinary items (net of tax) 252 (1.) Reported PAT 7,29 5, , Ann. EPS (Rs) Page 8 of 14

9 Reliance Industries Ltd () Segmental performance Revenues (Rs. cr) % yoy % qoq Petrochemical 19,398 23,1 (15.7) 21,239 (8.7) Refining 57,385 81,777 (29.8) 6,768 (5.6) Oil and gas 1,765 2,841 (37.9) 2,67 (14.6) Organized retail 6,42 4, , Others 3,127 3,447 (9.3) 2, EBIT (Rs mn) % yoy % qoq Petrochemical 2,639 2, , Refining 6,491 3, , Oil and gas (89.2) 242 (62.8) Organized retail Others EBIT margins (%) bps yoy bps qoq Petrochemical Refining Oil and gas (2,419) 11.7 (661) Organized retail (41) Others Revenue contribution (%) bps yoy bps qoq Petrochemical (116) Refining (46) Oil and gas (17) EBIT contribution (%) bps yoy bps qoq Petrochemical (966) 31.3 (269) Refining , Oil and gas (422).7 (27) Retail segment performance continues to improve Retail segment revenues for were higher by 28.9% yoy. In terms of profitability the segment reported an EBIT of Rs. 147cr as compared to Rs. 133cr in. PBIDT was at Rs. 243cr up 15.7% yoy. The improvement was on the back of better gross margins across the segments. The company has focused on enhancing its inventory management and has also been able to increase the penetration of its own brands. Benefits of operating leverage and higher contribution of better margin digital and fashion segment provided additional boost to the margins. Reliance Jio vast service offerings at ARPUs similar to incumbent players Robust jump in 4G phones sold in the year in India so far. Devices availability has enhanced ecosystem for Jio Voice has been working fine both on volte and WiFi Fibre spread is on target... jio centres are present across the country. Extensive testing phase on. Launched services for RIL group employees and family and friends on trial basis More than 6, people joined from 1,1 location in India End to end services being offered Vendors and channel partners also involved Large scale simulation of full services being offered Page 9 of 14

10 Reliance Industries Ltd () All processes and platforms getting extensively tested This is in addition to professional testing and external validation Data usage on both WiFi and cellular network is much better than expectations. Jio has started connecting large and medium size enterprises. Recent tie up with Reliance Communication has added further capacity. Capex to go up with new deal with Rcom. Spectrum charges and electronics. Other income higher than estimate For, RIL reported other income of Rs.2,289crs a decline of 4.7% yoy and growth of 41.6% qoq. Qoq jump was on account of sale of investments. Other income accounted for 24% of PBT as compared to 36% in. Company currently has Rs. 91,736cr of cash and cash equivalents on a consolidated basis. PAT higher than estimates RIL reported a PAT of Rs. 7,218crs higher than our and street expectations. At the segment level while EBIT performance of petrochemical segment as well as refining segment were better than estimated, oil & gas segment performance was below estimates. Maintain BUY Over the next three years, we believe, these core businesses of refining and petrochemicals will drive a strong 25% CAGR in standalone EBIDTA on the back of commencement of large scale projects off gas cracker and petcoke gasification. The petcoke gasification project whereby RIL is investing US$4bn is expected to commence operations in FY17. Commencement of this project will allow RIL to replace expensive RLNG with gas produced from petcoke leading to incremental US$2/bbl GRM (management guidance of US$2.5/bbl). Off gas cracker will provide a consistent low cost supply of feedstock to the petrochemical plants where RIL is increasing its capacity. While the global environment has been moderately improving form GRMs and petrochemical spreads, RIL will outperform the benchmarks by a significant margin. The domestic E&P segment will continue to reel under pressure of falling production, lower prices and bureaucratic issues. Shale gas too will continue to see pressure as realizations will remain weak. While Telecom business might achieve EBIDTA breakeven in three years considering its asset light model, Retail business will show improved trend in profitability. We are raising our estimates to factor in higher than expected PAT in. However, P/E valuations of 9.7x on FY17E earnings is much below RIL s historical average and we believe a re rating is due given strong earnings growth profile in the coming years. We maintain BUY with a 1 year price target of Rs1,2 (raised from Rs1,15 earlier). Page 1 of 14

11 Reliance Industries Ltd () Other income surges as % of PBT Cash balance increase sequentially 45% 4% 35% Other inc as % of PBT 95, 9, Rs. cr Cash 3% 25% 85, 2% 15% 8, 1% 5% % 75, 7, Revenue and EBIT contribution of refining segment surges Others Oil & Gas Petchem Refining 14, Rs. cr 12, 1, 8, 6, 4, 2, 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, Others Oil & Gas Petchem Refining Rs. cr Contribution of exports declines Effective tax rate was at 24.4% 8% 75% 7% 65% 6% 55% 5% 45% 4% Exports as % of Sales 25% 24% 23% 22% 21% 2% 19% 18% 17% 16% 15% Tax rate Page 11 of 14

12 Reliance Industries Ltd () Financial Summary (Standalone) Y/e 31 Mar (Rs. cr) FY15 FY16E FY17E FY17E Revenues 329,76 241,649 27, ,72 yoy growth (%) (15.6) (26.6) Operating profit 31,62 4,76 49,54 59,639 OPM (%) Pre exceptional PAT 22,719 27,92 34,543 42,763 Reported PAT 22,719 27,92 34,543 42,763 yoy growth (%) EPS (Rs) P/E (x) Price/Book (x) EV/EBITDA (x) Debt/Equity (x) RoE (%) RoCE (%) Page 12 of 14

13 Best Broker of the Year by Zee Business for contribution to broking Nirmal Jain, Chairman, IIFL, received the award for The Best Broker of the Year (for contribution to broking in India) at India's Best Market Analyst Awards 214 organised by the Zee Business in Mumbai. The award was presented by the guest of Honour Amit Shah, president of the Bharatiya Janata Party and Piyush Goel, Minister of state with independent charge for power, coal new and renewable energy. 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