Reliance Industries Ltd

Change in Estimates Rating Target Reliance Industries Ltd Revenues at Rs82bn, lower by 22.5% yoy driven by sharp fall in crude oil prices causing weak refining and petchem segment sales OPM improves by 163bps yoy and 45bps qoq; yoy improvement was led by 191bps increase in petchem segment EBIT margins, sequential improvement was led by 67bps rise in petchem EBIT margins GRMs were at US$7.3/bbl, was lower than our expectations, GRMs saw 3.9% yoy and 12% qoq fall mainly on account of inventory losses Shale gas revenues and EBIDTA declined qoq owing to fall in gas prices PAT at Rs5.8bn was lower than our estimates owing to lower than expected refining segment performance Cut estimates to factor in lower crude oil prices, we maintain BUY rating with reduced 2 year TP of Rs1,3 Result table (standalone) (Rs m) % yoy % qoq Net sales 81,96 1,35,21 (22.5) 964,86 (16.9) Material costs (634,5) (887,3) (28.5) (782,75) (18.9) Purchases (19,51) (3) 64,933.3 (17,36) 12.4 Personnel costs (8,32) (7,15) 16.4 (9,32) (1.7) Other overheads (67,55) (64,78) 4.3 (73,8) (7.6) Operating profit 72,8 76,22 (5.4) 82,35 (12.5) OPM (%) 9. 7.4 163 bps 8.5 45 bps Depreciation (21,5) (21,43) (1.8) (22,27) (5.5) Interest (8,81) (7,92) 11.2 (7,58) 16.2 Other income 24,2 23,5 4.2 21,4 12.2 PBT 66,24 69,92 (5.3) 73,9 (1.4) Tax (15,39) (14,81) 3.9 (16,48) (6.6) Effective tax rate (%) 23.2 21.2 22.3 PAT 5,85 55,11 (7.7) 57,42 (11.4) PAT margin (%) 6.3 5.3 12 bps 6. 39 bps Ann. EPS (Rs) 62.9 68.2 (7.8) 71. (11.5) Segmental performance Revenues (Rs mn) % yoy % qoq Petrochemical 213,6 252,8 (15.7) 249,32 (14.5) Refining 731,52 954,32 (23.3) 917,81 (2.3) Oil and gas 13,47 17,33 (22.3) 13,8 (2.4) EBIT margins (%) bps yoy bps qoq Petrochemical 1.3 8.4 191 9.6 67 Refining 4.4 3.3 18 4.1 25 Oil and gas 19.8 31.2 (1,134) 24.1 (424) Revenue contribution (%) bps yoy bps qoq Petrochemical 22.2 2.6 154 21.1 18 Refining 76.1 77.8 (175) 77.6 (152) Oil and gas 1.4 1.4 (1) 1.2 23 EBIT contribution (%) bps yoy bps qoq Petrochemical 38.3 36. 229 36.5 183 Refining 55.8 53.2 251 57.5 (173) Oil and gas 4.7 9.2 (45) 5. (38) 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. Rating: Sector: Sector view: Oil & Gas Neutral Sensex: 28,122 52 Week h/l (Rs): 1145 / 793 Market cap (Rscr) : 281,379 6m Avg vol ( Nos): 3,59 Bloomberg code: RIL IS BSE code: 5325 NSE code: RELIANCE FV (Rs): 1 Price as on January 16, 215 Share price trend 15 13 11 9 RELIANCE Sensex 7 Dec 13 Jun 14 Dec 14 Share holding pattern BUY Target (2 year): Rs1,3 CMP: Rs869 Upside: 49.6% Jun 14 Sep 14 Dec 14 Promoters 45.3 45.3 45.2 Institutions 3.8 3.8 3.9 Others 23.9 24. 23.9 Research Analyst: Prayesh Jain research@indiainfoline.com January 19, 215 Result Update

Reliance Industries () E&P segment KG D6 gas production continued to fall and during, the production averaged 12.1mmscmd as compared to 12.8mmscmd in. On yoy basis the volumes were lower by 4.7%. While crude oil production at the Pannna Mukta field was lower by 14.3% yoy, gas production increased by 8.2% yoy and 12.1% qoq on the back of production coming in from the infill wells completed in the previous quarter. Tapti field however continued to see natural decline and the production is expected to cease over the next six months. Revenues from the segment (standalone) were lower by 22.3% yoy owing to fall in production, steep fall in crude oil prices and were offset by higher gas prices and rupee depreciation. EBIT margins for the segment were at 19.8% as compared to 31.2% in and 24.1% in. Post the declaration of higher gas prices from November 1, 214 the company has been accounting for higher gas prices in the books and the difference between the new and the old prices are shown as receivables. Going ahead, the company has planned to arrest the decline in production but awaits key approvals from the government including budget approvals for capital expenditure. Trend in KG D6 gas production 6 mmscmd KG D6 production 5 4 3 2 1 Trend EBIT margins of E&P segment 18, 16, 14, 12, 1, 8, 6, 4, 2, Rs mn EBIT EBIT Margin 5.% 45.% 4.% 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% Update on E&P fields KG D6 Onshore Terminal Booster Compressor (OTBC): All construction activity completed Final tie ins underway System charging and testing underway Target commissioning of 2 compressor in 4Q FY15 Work over campaign in D1 D3 and MA to augment production Side track in MA5H currently underway; production from well expected by end 4Q FY15 D1 D3 work over campaign to resume post MA5H side track Appraisal of D55 Discovery Third appraisal well drilled to appraise Southern portion of Central segment. Results being analyzed and incorporated towards Resource appraisal Conceptual engineering studies underway 2

Reliance Industries () Panna Mukta and Tapti field Rig was mobilized towards the end of 3Q FY15 to drill work over wells and MB wells Cessation of production from Tapti is likely to occur over the next six month Relinquished block KG D3 Gas discoveries and prospects size small and scattered over a large area at significant offset from shore (> 5 kms) International Ventures RIL and Myanmar Oil and Gas Enterprise (MOGE) expected to sign PSC with respect to Myanmar blocks M17 and M18 RIL and PEMEX have entered into a MoU For assessment of potential upstream oil & gas business opportunities in Mexico Jointly evaluate value added opportunities in international markets CBM Development activities commenced in 2 CBM blocks Sohagpur East and West Phase 1 development program envisages drilling of more than 2 wells o Two Gas Gathering Stations and 8 Water Gathering Stations The land acquisition is in advanced stage; >7% of Phase 1 scope completed o Currently 4 rigs in operation o Completed drilling of 151 surface holes, 131 production holes and performed 1 hydrofracturing jobs o Concept and FEED for surface facilities is completed and detailed engineering is in advance stage First gas production expected by mid FY16 Shahdol Phulpur Gas Pipeline Project o 1% completion of land acquisition and RoU Notification under PMP Act. o FEED and detailed engineering completed o All construction contracts awarded construction work in progress Update on shale gas assets For, RIL s revenues and EBIDTA from shale gas business were at US$26mn and US$174mn While production volumes were higher by 21.1% yoy, revenues were lower by 6.9% yoy owing to 24.8% yoy fall in realizations Reliance share of net sales volumes at 45.3 Bcfe up 23.8% yoy and 6.8% qoq Capex for the quarter was at US$264mn taking the cumulative investments to over US$7.9bn across all JVs Trend in RIL s share of sales volume Trend in number of wells drilled 5 45 4 35 3 25 2 15 1 5 Liquid Condensate Gas bcfe 1,2 1, 8 6 4 2 Nos Nof wells drilled Producing wells 3

Reliance Industries () Status of individual shale gas assets Source: Company Refining segment RIL reported GRMs of US$7.3/bbl in as against US$7.6/bbl in and US$8.3/bbl in. The GRMs were lower than our estimates. Benchmark Singapore GRMS were higher on a sequential basis as fall in product prices was much lower than crude oil prices. Gasoline, gasoil and Jet Kero cracks were very strong during the quarter. Drop in RIL margins was mainly on the back of inventory losses. The fall would have been steeper had it not been for 1) flexibility in production whereby the company reduced Naphtha production by 2% and increased gasoline production commensurately; also the company increased production of Jet Kero by 35%, 2) full sweating of the assets as the refinery processed a record 17.7mmt of crude at utilization rate of 114%, 3) three new crudes processed during the quarter and 4) narrowing of sweet sour crude differentials which provide an edge to RIL to suitably alter the sourcing strategy to increase the crudes priced on Sweet benchmarks. Revenue for the segment was lower by 23.3% yoy owing to lower product prices. EBIT margins for the segment at 4.4% were higher by 18bps yoy and 25bps sequentially. Trend in RIL s GRMs Trend in throughput 12 1 8 US$/bbl RIL GRM Singapore GRM 18 17 16 Mn tons 6 15 4 14 2 13 12 4

Reliance Industries () Reentering the fuel retailing business The company is reentering fuel retailing business as the prices of both petrol and diesel are now decontrolled. It has already opened 23 outlets and it has plans to commission the entire network within a year. The company is launching aggressive consumer schemes for quick ramp up of volumes and is likely to price its products at par with the OMCs as against a premium which it used to charge earlier. RIL is planning to launch unique value added services such as fleet management program, customized loyalty program for different segments, etc. Outlook for GRMs Oil prices have crashed very near to the marginal production cost; eventually need to recover to support new developments Post recent crash, oil prices likely to witness slow recovery, leading to a sustained period of relatively low prices outlook for oil importing emerging economies positive Stronger oil demand growth likely primarily through income effects and higher consumer and government spending Demand from Non OECD countries mainly in Asia expected to grow at a strong pace Likely capacity addition of over 2.5 MBD in the next two years Delays in project commissioning, slow ramp up likely to bring the capacity additions in line with the oil demand growth Gasoline consumption will respond to cheaper prices, leading to supportive margins Seasonal strength in naphtha demand expected Petrochemical segment During, petrochemical segment revenues were lower 16% yoy and 15% qoq. Volumes were lower by 5.4% yoy and 7.3% qoq mainly on account of the shutdown seen at Hazira. Realizations too witnessed declines of 1.9% yoy and 8.1% qoq in line with sharp correction seen in crude oil prices. However, the declines were much lower than the fall in crude prices. Spreads for most products were at historical highs as end product price fall was much lower than feedstock prices. EBIT margin for the segment at 1.3% was higher by 191bps yoy and 67bps qoq. Ethylene cash cost curve advantage for ethane based producers reduced Source: Company 5

Reliance Industries () Trend in petrochemical prices 12 11 1 9 8 7 6 Rs/kg PE PP 12 11 1 9 8 7 6 5 4 Rs/kg POY PSF 75 7 65 6 55 5 45 4 35 3 Rs/kg PTA MEG Source: Company Trend in petrochemical deltas 9 8 7 US$/ton HDPE Naphtha 4 3 US$/ton PP Propylene 65 6 55 US$/ton PVC EDC 6 2 5 5 4 1 45 4 3 35 Source: Company 6 5 US$/ton POY PTA MEG 5 4 US$/ton PSF PTA MEG 2, 1,5 PBR BD US$/ton 4 3 3 2 1, 2 1 5 1 Source: Company Petchem revenues fall on lower realizations EBIT margins for petchem improve sequentially 3 25 2 15 1 5 Rs bn Revenues yoy growth 5% 4% 3% 2% 1% % 1% 3, 25, 2, 15, 1, 5, Rs mn EBIT EBIT Margins 16.% 14.% 12.% 1.% 8.% 6.% 4.% 2.% 2%.% 6

Reliance Industries () Outlook for petrochemical segment Low oil prices and growth in U.S. supportive of global economic recovery Weak Eurozone and signs of stress in China and Japan are concerns Asian polymer demand to grow faster than global demand growth Global ethylene operating rates expected to sustain high levels in 215 216 Polymer margins likely to normalize in near term, but remain healthy on lower feedstock prices ROGC project : Fast track execution on going; construction work at an advanced stage Ethane imports form US : signed shipping agreements with MITSUI O.S.K. LINES for transporting liquefied ethane from North America to India MOL to supervise the construction of six VLECs; also operate and manage the vessels on delivery Outlook for polyester and fibre intermediates Feedstock price stability could spur demand for building pipeline stock in the polyester and textile chain Low polyester prices to uplift demand in near term, however buyers still cautious Chinese industry expected to gain from increased export benefits and domestic policies PX dynamics would largely be determined by supply side factors Demand from polyester downstream expected to witness normal growth MEG markets to remain tight fundamentally, but prices and trade to be guided by PTA markets PTA capacity overhang to continue, demand growth from polyester sector to aid margin environment Consolidated results strong performance Financial results (Rs m) % yoy % qoq Net sales 935,28 1,18,38 (2.8) 1,97,97 (14.8) Material costs (684,3) (95,29) (28.) (82,18) (14.7) Purchases (5,5) (48,14) 4.9 (85,26) (4.8) Personnel costs (15,48) (11,73) 32. (15,75) (1.7) Other overheads (98,11) (83,71) 17.2 (96,6) 1.6 Operating profit 86,89 86,51.4 98,18 (11.5) OPM (%) 9.3 7.3 196 bps 8.9 35 bps Depreciation (29,54) (27,76) 6.4 (3,24) (2.3) Interest (11,37) (9,61) 18.3 (9,97) 14. Other income 23,4 2,76 12.7 2,9 16.5 PBT 69,38 69,9 (.7) 78,6 (11.1) Tax (17,47) (14,94) 16.9 (18,82) (7.2) Effective tax rate (%) 25.2 21.4 24.1 Other provisions / minority etc 65 6 983.3 48 35.4 PAT 52,56 55,2 (4.5) 59,72 (12.) PAT margin (%) 5.6 4.7 96 bps 5.4 18 bps Ann. EPS (Rs) 65. 68.1 (4.6) 73.9 (12.) 7

Reliance Industries () Segmental performance Revenues (Rs mn) % yoy % qoq Petrochemical 23,1 271,21 (15.2) 266,51 (13.7) Refining 817,77 1,76,76 (24.1) 1,35,9 (21.1) Oil and gas 28,41 29,26 (2.9) 3,2 (5.4) Organized retail 46,86 39,41 18.9 41,67 12.5 Others 34,47 13,93 147.5 24,55 4.4 EBIT (Rs mn) % yoy % qoq Petrochemical 2,64 21,15 (2.4) 23,61 (12.6) Refining 32,67 32,4.8 38,44 (15.) Oil and gas 8,32 6,7 37.1 8,18 1.7 Organized retail 1,33 38 25. 99 34.3 Others 2,48 2,44 1.6 2,72 (8.8) EBIT margins (%) bps yoy bps qoq Petrochemical 9. 7.8 118 8.9 11 Refining 4. 3. 99 3.7 28 Oil and gas 29.3 2.7 854 27.2 24 Organized retail 2.8 1. 187 2.4 46 Others 7.2 17.5 (1,32) 11.1 (388) Retail segment performance continues to improve Retail segment revenues for were higher by 18.9% yoy while like for like growth was at 19% yoy. In terms of profitability the segment reported an EBIT of Rs1,33mn as compared to Rs38mn in. PBIDT was at Rs2,27mn up 114% 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. During the quarter the company added 279 stores at net level. Contribution of Digital and fashion increase 1% 9% 8% 7% 6% 5% 4% 3% Brands Jewellery Fashion & lifestyle Digital Value & others 2% 1% % Jewellery segment hits a roadblock 4% 35% 3% 25% 2% 15% 1% 5% % 5% 1% Value & others Digital Fashion & lifestyle Jewellery Brands Other income higher than expectation For, RIL reported other income of Rs24bn a growth of 4.2% yoy and 12.2% qoq. While available cash balance was lower yields were better. Other income accounted for 36% of PBT as compared to 33% in. Company currently has Rs786bn of cash and cash equivalents. Depreciation was lower on a yoy basis owing to implementation of new rules in the new companies act whereby the depreciable life of certain assets has been increased. 8

Reliance Industries () PAT lower than estimates RIL reported a PAT of Rs5.8bn lower than our expectations. At the segment level while EBIT performance of petrochemical segment was better than expectations, refining segment and oil & gas segment reported weaker than estimated performance which had an offsetting impact. Interest costs were higher by 11.2% owing to the higher net debt. Maintain BUY Over the past few years RIL has underperformed the broader market rally. One of the prime reasons for the same has been a weak performance of its E&P segment plagued by falling gas production and bureaucratic issues. Over the next three years, we believe, these core businesses 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 E&P segment, which has gone through its share of trials and tribulations, is likely to see a revival in fortunes with gas price hike, moderate increase in production at KG D6, commencement of production at new fields and possible exploration upsides from current exploration activities. Shale gas on the other hand will continue to show robust growth in revenues and profitability as both volumes and gas prices head north. 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 cutting our estimates to factor in lower crude oil prices. However, P/E valuations of 12x on FY16E 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 revised 2 year price target of Rs1,3. Other income surges as % of PBT Cash balance declines sequentially due to capex 45% 4% 35% 3% 25% 2% 15% 1% 5% % Other inc as % of PBT 1, 9 8 7 6 5 4 3 2 1 Rs bn Cash 9

Reliance Industries () Revenue and EBIT contribution of refining segment surges 1,4 Others Oil & Gas Petchem Refining Rs bn 8, 1,2 7, 1, 6, 8 5, 4, 6 3, 4 2, 2 1, Others Oil & Gas Petchem Refining Rs mn Steep rupee depreciation drives export revenues Effective tax rate was at 23.2% 8% Exports as % of Sales 75% 7% 65% 6% 55% 5% 45% 4% 24% 23% 22% 21% 2% 19% 18% 17% 16% 15% Tax rate Financial Summary (Standalone) Y/e 31 Mar (Rs mn) FY14 FY15E FY16E FY17E Revenues 3,91,17 3,551,246 3,286,336 3,452,637 yoy growth (%) 8.3 (9.) (7.5) 5.1 Operating profit 38,77 295,34 335,227 499,634 OPM (%) 7.9 8.3 1.2 14.5 Pre exceptional PAT 219,84 21,588 234,321 354,2 Reported PAT 219,84 21,588 234,321 354,2 yoy growth (%) 4.7 (4.2) 11.3 51.2 EPS (Rs) 68.1 65.2 72.6 19.7 P/E (x) 12.8 13.3 12. 7.9 Price/Book (x) 1.4 1.3 1.2 1.1 EV/EBITDA (x) 1.7 11.3 1.5 6.7 Debt/Equity (x).4.4.4.4 RoE (%) 11.7 1.2 1.5 14.2 RoCE (%) 11.5 9.7 1. 13.5 1

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