Impressive performance April 25, 2017 Avishek Datta avishekdatta@plindia.com +91 22 66322254 Rating Accumulate Price Rs1,416 Target Price Rs1,343 Implied Upside 5.2% Sensex 29,656 Nifty 9,218 (Prices as on April 24, 2017) Trading data Market Cap. (Rs bn) 4,589.1 Shares o/s (m) 3,240.0 3M Avg. Daily value (Rs m) 33619.4 Major shareholders Promoters 46.46% Foreign 20.05% Domestic Inst. 14.38% Public & Other 19.12% Stock Performance (%) 1M 6M 12M Absolute 10.1 33.2 36.4 Relative 9.3 27.9 21.6 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2018 100.6 93.0 8.2 2019 111.1 104.6 6.2 Price Performance (RIC: RELI.BO, BB: RIL IN) (Rs) 1,600 1,400 1,200 1,000 800 600 400 200 0 Apr 16 Jun 16 Source: Bloomberg Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Strong performance: RIL reported highest quarterly profits in Q4FY17. Results were ahead of our estimates; Standalone EBITDA of Rs112.8bn (PLe: Rs105.6bn), PAT of Rs81.5bn (PLe: Rs77.2bn). Healthy performance was supported by higher than expected GRMs along with lower finance charges and lower tax rate. For FY17, standalone PAT was at Rs314.2bn (+14.7%YoY). For Q4, GRMs were strong at US$11.5/bbl (PLe: US$10.5/bbl) despite lower benchmark levels (US$6.4/bbl in Q4 vs US$6.7/bbl in Q3) due to higher production of gasoline and active feed stock management to benefit from lower Brent Dubai spreads. RIL plans to operationalise its entire retail pump network of 1,400 stations by next quarter and will also target 1,400 other trading areas. Petrochemical earnings resilient, E&P disappoints: For Q4FY17, petrochemicals EBIT were at Rs34.5bn (+3%QoQ) supported by higher production volumes despite lower spreads. E&P EBIT for Q4FY17 was at Rs(780mn) due to lower volumes; KGD6 volume was at 7.4mmscmd (Q4FY16: 9.7mmscmd) and natural field decline at Panna Mukta block. RIL has commenced commercial production of CBM gas from March 17 and is likely to end FY18 with ~2.5mmscmd volume. Telecom capex at Rs1,790bn: RIL has spent Rs1,790bn towards RJio till FY17 (Q4 capex at Rs190bn), including Rs120bn towards write down in spectrum value. RJio has 109m subscribers and management expects capex intensity to come off post Q1FY18 when they plan capex of Rs190bn. However, management remains non committal on capitalisation of Rjio in near term. Project commissioning on a fast track: RIL has already commissioned two phases of Paraxylene project and last phase to be commissioned shortly. The offgas cracker will be commissioned in Q1FY18 and the petcoke gasification project s full mechanical completion is expected by Q3FY18. We tweak our earnings to factor in rupee appreciation and change in GRMs; Reiterate Accumulate with a PT of Rs1,343 (Rs 1,207 early) on roll over to March19. Key financials (Y/e March) 2016 2017 2018E 2019E Revenues (Rs m) 2,331,580 2,926,569 3,123,990 3,278,673 Growth (%) (29.1) 25.5 6.7 5.0 EBITDA (Rs m) 401,390 450,093 505,565 547,677 PAT (Rs m) 274,170 309,892 325,840 359,913 EPS (Rs) 84.6 95.6 100.6 111.1 Growth (%) 20.5 13.0 5.1 10.5 Net DPS (Rs) 9.6 15.0 16.0 17.0 Profitability & Valuation 2016 2017 2018E 2019E EBITDA margin (%) 17.2 15.4 16.2 16.7 RoE (%) 12.0 12.6 12.6 13.2 RoCE (%) 8.6 9.3 9.6 10.3 EV / sales (x) 2.4 1.9 1.8 1.7 EV / EBITDA (x) 13.9 12.4 11.0 10.1 PE (x) 16.7 14.8 14.1 12.8 P / BV (x) 1.9 1.8 1.7 1.6 Net dividend yield (%) 0.7 1.1 1.1 1.2 Source: Company Data; PL Research Q4FY17 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Key Analyst Meet Takeaways: RJio: RIL currently has 109m users on board and has already captured bulk of 134m 4G customers. For Q4FY17, telecom capex was at Rs190bn and intensity is likely to remain same in Q1FY18 post which the pace will come off. Total capex on RJio stands at Rs1,790bn till FY17 end and includes Rs120bn from write down in value of spectrum. Retail: RIL s retail business reported EBITDA at Rs3.7bn in Q4FY17. This includes fuel retail earnings from ~1,200 outlets currently on. On fuel retailing, RIL has garnered 5.8% in the bulk diesel space. New projects: RIL has already commissioned two phases of Paraxylene project and last phase to be commissioned shortly. The offgas cracker will be commissioned in Q1FY18 and the petcoke gasification project s full mechanical completion is expected by Q3FY18. For FY18, non Jio capex is likely at US$2.5bn. Exhibit 1: Q4FY17 Result Overview (Rs m) Y/e March Q4FY17 Q43FY16 YoY gr. (%) Q3FY17 FY17 FY16 YoY gr. (%) Net sales 745,980 541,890 37.7 666,060 2,590,440 2,456,460 5.5 Inc/dec in stock (5,600) 26,350 NA (22,530) (48,390) 41,710 NA Raw materials external purchases 470,400 284,750 65.2 443,180 1,694,110 1,570,100 7.9 Staff cost 12,180 10,130 20.2 9,490 44,340 42,610 4.1 Other expenditure 156,200 117,250 33.2 129,880 467,820 408,560 14.5 Total 633,180 438,480 44.4 560,020 2,157,880 2,062,980 4.6 Operating profit 112,800 103,410 9.1 106,040 432,560 393,480 9.9 Other income 13,710 21,410 (36.0) 30,250 87,090 78,210 11.4 Interest 2,350 5,860 (59.9) 9,310 27,230 25,620 6.3 Depreciation 24,090 23,270 3.5 20,770 84,650 85,900 (1.5) PBT 100,070 95,690 4.6 106,210 407,770 360,170 13.2 Tax 18,560 23,420 (20.8) 25,990 93,520 85,900 8.9 Tax rate (%) 18.5 24.5 24.5 22.9 23.8 Net profit 81,510 72,270 12.8 80,220 314,250 274,270 14.6 April 25, 2017 2
Exhibit 2: RIL quarterly volume and margin details US$/bbl Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Crude throughput (MTPA) 17.1 18 17.8 16.8 18 17.8 17.5 Reliance GRMs ($/bbl)] 10.6 11.5 10.8 11.5 10.1 10.8 11.5 Singapore GRMs ($/bbl) 6.3 8 7.8 5 5.1 6.7 6.4 Difference ($/bbl) 4.3 3.5 3.0 6.5 5.0 4.1 5.1 KGD6 Gas mmscmd 11.6 10.7 9.7 8.7 7.7 7.5 7.4 MA Oil tonnes 52,838 56,071 44,709 37,935 35,225 35,225 37,935 Exhibit 3: RIL PBIT trend (Rs m) Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Petrochem 25,200 25,840 27,200 29,010 34,640 33,590 34,540 Refining 54,140 63,170 63,620 65,810 59,010 61,270 62,620 Oil & Gas 560 2,440 2,420 480 240 1,250 780 Others 560 880 880 990 900 1,140 1,190 Total 80,460 92,330 89,280 96,290 94,790 94,750 97,570 Exhibit 4: RIL earnings change Y17 FY18E FY19E New Old % chg New Old % chg Net sales 2,650 3,124 3,181 2% 3,279 3,334 2% EBIDTA 433 506 526 4% 548 566 3% PAT 314 326 342 5% 360 374 4% April 25, 2017 3
Income Statement (Rs m) Net Revenue 2,331,580 2,926,569 3,123,990 3,278,673 Raw Material Expenses 1,780,500 2,305,333 2,426,921 2,516,813 Gross Profit 551,080 621,236 697,068 761,860 Employee Cost Other Expenses 149,690 171,144 191,504 214,183 EBITDA 401,390 450,093 505,565 547,677 Depr. & Amortization 95,660 87,713 115,018 122,411 Net Interest 24,540 35,953 46,102 50,763 Other Income 75,820 78,702 85,500 100,839 Profit before Tax 357,010 405,129 429,945 475,342 Total Tax 82,840 95,236 104,105 115,429 Profit after Tax 274,170 309,892 325,840 359,913 Ex Od items / Min. Int. Adj. PAT 274,170 309,892 325,840 359,913 Avg. Shares O/S (m) 3,240.0 3,240.0 3,240.0 3,240.0 EPS (Rs.) 84.6 95.6 100.6 111.1 Cash Flow Abstract (Rs m) C/F from Operations 768,453 751,257 514,894 549,195 C/F from Investing (572,960) (732,860) 137,400 (109,923) C/F from Financing 298,788 (235,570) (475,374) (483,728) Inc. / Dec. in Cash 494,281 (217,173) 176,920 (44,455) Opening Cash 115,710 68,920 75,812 83,393 Closing Cash 68,920 75,812 83,393 91,733 FCFF 483,770 (476,719) 217,721 204,510 FCFE 573,631 (491,719) 202,721 189,510 Key Financial Metrics Growth Revenue (%) (29.1) 25.5 6.7 5.0 EBITDA (%) 26.7 12.1 12.3 8.3 PAT (%) 20.7 13.0 5.1 10.5 EPS (%) 20.5 13.0 5.1 10.5 Profitability EBITDA Margin (%) 17.2 15.4 16.2 16.7 PAT Margin (%) 11.8 10.6 10.4 11.0 RoCE (%) 8.6 9.3 9.6 10.3 RoE (%) 12.0 12.6 12.6 13.2 Balance Sheet Net Debt : Equity 0.4 0.4 0.4 0.3 Net Wrkng Cap. (days) 32 (24) (25) (25) Valuation PER (x) 16.7 14.8 14.1 12.8 P / B (x) 1.9 1.8 1.7 1.6 EV / EBITDA (x) 13.9 12.4 11.0 10.1 EV / Sales (x) 2.4 1.9 1.8 1.7 Earnings Quality Eff. Tax Rate 23.2 23.5 24.2 24.3 Other Inc / PBT 21.2 19.4 19.9 21.2 Eff. Depr. Rate (%) 3.6 2.3 2.8 2.8 FCFE / PAT 209.2 (158.7) 62.2 52.7. Balance Sheet Abstract (Rs m) Shareholder's Funds 2,401,840 2,517,246 2,643,140 2,794,775 Total Debt 1,074,830 1,059,830 1,044,830 1,029,830 Other Liabilities 183,814 211,241 223,446 238,798 Total Liabilities 3,660,484 3,788,317 3,911,416 4,063,403 Net Fixed Assets 2,382,890 3,028,037 2,775,618 2,697,630 Goodwill Investments 1,761,854 1,534,974 1,926,872 2,095,116 Net Current Assets (484,260) (774,693) (791,075) (794,845) Cash & Equivalents 68,920 75,812 83,393 91,733 Other Current Assets 392,700 364,137 370,001 382,237 Current Liabilities 945,880 1,214,642 1,244,469 1,268,814 Other Assets Total Assets 3,660,484 3,788,317 3,911,415 3,997,901 Quarterly Financials (Rs m) Y/e March Q1FY17 Q2FY17 Q3FY17 Q4FY17 Net Revenue 534,960 643,440 666,060 745,980 EBITDA 108,170 105,550 106,040 112,800 % of revenue 20.2 16.4 15.9 15.1 Depr. & Amortization 19,500 20,290 20,770 24,090 Net Interest 9,240 6,330 9,310 2,350 Other Income 20,330 22,800 30,250 13,710 Profit before Tax 99,760 101,730 106,210 100,070 Total Tax 24,280 24,690 25,990 18,560 Profit after Tax 75,480 77,040 80,220 81,510 Adj. PAT 75,480 77,040 80,220 81,510 Key Operating Metrics Brent (US$/bbl) 47.4 50.0 55.0 60.0 GRM(US$/bbl) 10.8 10.5 10.9 11.2 Refining thruput (MTPA) 69.6 69.0 69.0 70.0 US$/Rs 65.4 66.5 66.0 67.0. April 25, 2017 4
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 53.8% 30.3% 16.0% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Avishek Datta (MBA), Research Analysts, 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. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Avishek Datta (MBA), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, 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 related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. April 25, 2017 5