Change in Estimates Rating Target Reliance Industries Ltd. Yet another strong quarter BUY Sector: Oil & Gas Sector View: Neutral Analyst: Prayesh Jain research@indiainfoline.com Stock Data Sensex: 25,598 52 Week h/l (Rs): 19 / 818 Market cap (Rscr) : 3,42,65 6m Avg t/o (Rscr): 21 Bloomberg code: RIL IS BSE code: 5325 NSE code: RELIANCE FV (Rs): 1 Div yield (%):.9 Prices as on April 22, 216 Shareholding Pattern Sep 15 Dec 15 Mar 16 Promoters 45.2 46.7 45.2 FII+DII 31.8 32.9 32.3 Others 23. 2.4 22.5 Share Price Trend 14 12 1 8 6 RELIANCE Sensex 4 Apr 15 Aug 15 Dec 15 Apr 16 April 25, 216 Result Update CMP: Rs1,39 1 yr Target: Rs1,2 Upside: 15.5% Reliance Industries performance was ahead of estimates on the back of an strong performance from both refining and petchem segments OPM improved 68bps yoy and 331bps qoq to 21.5% much higher than our expectations; yoy increase was led by 338bps and 61bps rise in petchem and refining segment EBIT margins respectively US$1.8/bbl GRMs was higher than our estimates PAT at Rs. 7,32cr was higher than our estimates due to better than expected refining and petchem performance and lower interest costs Maintain our BUY recommendation and 1 year target of Rs1,2 Result table (Rs. cr) % yoy % qoq Net sales 49,957 56,43 (1.9) 56,567 (11.7) Material costs (3,252) (37,37) (19.) (37,682) (19.7) Purchases (858) (1,731) (5.4) (949) (9.6) Personnel costs (1,13) (993) 2. (1,91) (7.1) Other overheads (7,17) (7,32) (2.9) (6,573) 8.1 Operating profit 1,727 8,629 24.3 1,272 4.4 OPM (%) 21.5 15.4 68 bps 18.2 331 bps Depreciation (2,524) (2,132) 18.4 (2,45) 4.9 Interest (554) (44) 37.1 (69) (9.) Other income 1,858 2,133 (12.9) 2,289 (18.8) PBT 9,57 8,226 15.6 9,547 (.4) Tax (2,187) (1,983) 1.3 (2,329) (6.1) Effective tax rate (%) 23. 24.1 24.4 Adjusted PAT 7,32 6,243 17.3 7,218 1.4 Adj. PAT margin (%) 14.7 11.1 351 bps 12.8 189 bps Ann. EPS (Rs) 9.4 77.2 17.1 89.1 1.4 Segmental performance Revenues () % yoy % qoq Petrochemical 19,548 2,56 (2.5) 18,31 8.4 Refining 4,329 48,639 (17.1) 49,552 (18.6) Oil and gas 91 1,223 (26.3) 992 (9.2) EBIT margins (%) bps yoy bps qoq Petrochemical 14. 1.6 338 14.4 (41) Refining 15.8 9.7 61 12.8 33 Oil and gas (1.7) 13.4 (2,46) 3.9 (1,459) Revenue contribution (%) bps yoy bps qoq Petrochemical 32. 28.5 344 26.2 578 Refining 66. 69.2 (324) 72. (63) Oil and gas 1.5 1.7 (27) 1.4 3 EBIT contribution (%) bps yoy bps qoq Petrochemical 3. 29.7 26 28.6 136 Refining 7.1 66.2 386 7. 13 Oil and gas (1.1) 2.3 (335).4 (149) 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)
Reliance Industries Ltd () performance better than expectations Reliance Industries (RIL) reported a better than expected performance in. Operating profit at Rs1,727cr was ahead of our estimates of Rs9,891cr. Resultant OPM was at 21.5% as compared to our estimate of 18.1%. OPM was higher by 68bps yoy and 331bps qoq. The strong show was on the back of higher than estimated EBIT in both refining and petrochemical segments. PAT at Rs7,32cr was substantially ahead of our estimates of Rs6,83cr driven by strong operating performance and lower than expected interest costs. Refining segment: A good show yet again Reliance Industries Ltd (RIL) reported a better than expected performance for the refining segment yet again. The throughput of the refineries was at 178 lakh tons as compared to our estimate of 175 lakh tons. The GRMs were at US$1.8/bbl compared to our estimate of US$1.5/bbl. This was against US$11.5/bbl in and US$1.1/bbl in. As compared to the benchmarks the performance continued to be stronger as the spread of RIL GRM v/s Singapore GRM was at US$3.1/bbl vis à vis US$1.5/bbl in. EBIT for the segment saw a surge of 34.9% yoy and EBIT margins at 15.8% was higher by 61bps yoy. The strong show has been driven by 1) continued strength in gasoline spreads, 2) sourcing of low cost crude and 3) marketing in profitable markets. The company has opened 95 retail outlets so far and is now clocking an average run rate of ~24KLPM. The domestic marketing (retail + bulk) volumes reached 3mn KLPA exit rate. Going ahead we expect the GRMs to remain strong considering 1) slowdown in capacity additions, 2) strong demand growth for petroleum products in India, 3) commencement of petcoke gasification project for RIL. Trend in RIL s GRMs RIL GRM Singapore GRM 14 US$/bbl 12 1 8 6 4 2 Trend in throughput 19 18 17 16 15 14 13 12 Mn tons Page 2 of 11
Reliance Industries Ltd () Petrochemical segment: Strong polymer deltas For, RIL s petrochemical segment delivered better than estimated performance as product spreads were higher than estimates particularly so for the polymers. For the quarter, the production volumes were at 63 lakh tons as compared to 56 lakh tons in. The growth was on the back of commencement of new capacities and strong demand in the domestic market. EBIT margins for the segment were at 14% as compared to 1.6% in.the growth was on the back of strengths in polymer spreads 1) PP deltas softened on account of firm propylene prices amid tight supply on the back of ongoing and upcoming maintenance in the region, 2) PE deltas improved mainly on account of subdued naphtha prices following the fall in crude oil prices, 3) PVC delta remained firm with softening of feedstock prices and comparatively stable PVC demand. For intermediates 1) PX delta firmed up supported by recovery in downstream market, tight feedstock supply on gasoline blending and weak naphtha prices 2) Curtailed production and recovery in polyester demand post Lunar holidays supported PTA delta and 3) MEG delta improved due to tight supply owing to several outages and speculative buying. Polyester deltas were a mixed bag POY delta strengthened on account of steady sales owing to strong Chinese replenishment demand post Chinese Lunar holidays, 2) PSF demand and operating rates in China improved, however this was not reflected in the deltas, 3) PET demand was strong on seasonal factors however deltas were mildly under pressure with adequate supply. Going ahead the demand is expected to be strong in India and new initiatives by RIL such as ROGC and Ethane project will be margin accretive. 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 12 11 1 9 8 7 6 5 4 Rs/kg POY PSF Source: Company Trend in petrochemical deltas 9 8 7 HDPE Naphtha 4 3 PP Propylene 65 6 55 PVC EDC 6 5 4 3 2 1 5 45 4 35 Source: Company Page 3 of 11
Reliance Industries Ltd () 5 4 PSF PTA MEG 3 25 PET PTA MEG 6 5 POY PTA MEG 3 2 1 2 15 1 5 4 3 2 1 Source: Company Petchem revenues fall on lower realizations EBIT margins for petchem fall sequentially 3, 25, 2, 15, 1, 5, Revenues yoy growth 25% 2% 15% 1% 5% % 5% 1% 15% 2% 25% 3, 2,5 2, 1,5 1, 5 EBIT EBIT Margins 16.% 14.% 12.% 1.% 8.% 6.% 4.% 2.%.% E&P segment both volumes and realizations decline KG D6 gas production at 9.7mmscmd represented a fall of 14.7% on yoy basis and 9.7% on a qoq basis on the back of natural decline. Panna Mukta fields produced 1.8 million barrels of crude oil and 17.98 BCF of natural gas in a rise of 14.2% yoy and 2.8% yoy respectively. The increase was on the back of Restoration of production at full capacity post rectification of gas export line and gains from well stimulation jobs. Tapti fields produced miniscule amounts of oil and gas due to cessation of production at the field. Revenues from the segment (standalone) were lower by 26.3% 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 1.7% as compared to 13.4% in and 3.9% in. CBM test production is expected to commence in Q1 FY17. Shale Gas business pressure on volumes and realizations continue For, shale gas production was at 5.6bcfe a decline of 7% yoy. Revenues were lower by 26% yoy to US$82mn on the back of sharp fall in realizations. EBIDTA was even lower with a 53% fall due to impact of operating deleverage. The company has improved efficiencies and D&C costs wherein year end well costs lower by 24 25%. Also it has improved execution efficiencies, re negotiated service costs and has made well design improvements. Activity levels have been substantially pruned wherein zero rigs were in operations from Mar 16 and no drilling was done in Marcellus JVs. For, capex was at US$113mn down 31% QoQ Page 4 of 11
Reliance Industries Ltd () Trend in KG D6 gas production 4 mmscmd KG D6 production 35 3 25 2 15 1 5 Trend EBIT margins of E&P segment 1,2 1, 8 6 4 2 2 EBIT EBIT Margin 5.% 4.% 3.% 2.% 1.%.% 1.% 2.% Trend in RIL s revenue and EBIDTA from Shale gas 3 US$ mn Revenue EBIDTA US$ mn 25 25 2 2 15 1 15 1 5 5 Page 5 of 11
Reliance Industries Ltd () Consolidated results weak shale gas performance impacts profitability Financial results (Rs m) % yoy % qoq Net sales 6,252 67,47 (1.7) 68,261 (11.7) Material costs (3,12) (39,868) (24.7) (39,547) (24.1) Purchases (7,351) (6,817) 7.8 (6,771) 8.6 Personnel costs (1,936) (1,659) 16.7 (2,26) (4.4) Other overheads (8,945) (9,258) (3.4) (8,549) 4.6 Operating profit 12,8 9,868 21.7 11,368 5.6 OPM (%) 19.9 14.6 53 bps 16.7 328 bps Depreciation (3,571) (2,787) 28.1 (3,133) 14. Interest (813) (677) 2.1 (921) (11.7) Other income 1,758 2,172 (19.1) 2,426 (27.5) PBT 9,382 8,576 9.4 9,74 (3.7) Tax (2,168) (2,8) 4.2 (2,383) (9.) Effective tax rate (%) 23.1 24.3 24.5 Other provisions / minority etc 13 (115) (111.3) (67) (119.4) Adjusted PAT 7,227 6,381 13.3 7,29 (.9) Adj. PAT margin (%) 12. 9.5 254 bps 1.7 132 bps Extra ordinary items (net of tax) 171 Reported PAT 7,398 6,381 15.9 7,29 1.5 Ann. EPS (Rs) 89.2 78.9 13.1 9. (.9) Segmental performance Revenues () % yoy % qoq Petrochemical 2,915 21,754 (3.9) 19,398 7.8 Refining 48,64 56,442 (14.8) 57,385 (16.2) Oil and gas 1,638 2,513 (34.8) 1,765 (7.2) Organized retail 5,781 4,788 2.7 6,42 (4.3) Others 2,869 2,833 1.3 3,127 (8.3) EBIT (Rs mn) % yoy % qoq Petrochemical 2,713 2,3 35.4 2,639 2.8 Refining 6,394 4,92 3.4 6,491 (1.5) Oil and gas 14 489 (97.1) 9 (84.4) Organized retail 131 14 26. 147 (1.9) Others 32 322 (.6) 285 12.3 EBIT margins (%) bps yoy bps qoq Petrochemical 13. 9.2 376 13.6 (63) Refining 13.3 8.7 462 11.3 199 Oil and gas.9 19.5 (1,86) 5.1 (424) Organized retail 2.3 2.2 9 2.4 (17) Others 11.2 11.4 (21) 9.1 24 Page 6 of 11
Reliance Industries Ltd () Retail segment a decent quarter Retail segment revenues for were higher by 2.7% yoy. In terms of profitability the segment reported an EBIT of Rs. 131cr as compared to Rs. 14cr in. PBIDT was at Rs. 235cr up 18% 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 Successful launch for employees Reliance Jio successfully launched full scale service offerings for the RIL group employees, partners, vendors and associates on a trial basis on 28th December 215. Over 5 lakh users have been onboarded on the network. The initial feedback has been encouraging and has established smooth operations of all aspects of the network. All the digital applications have also been tested extensively as part of the employee launch program. The average monthly consumption per user is in excess of 18GB within the first month of service and is increasing rapidly. Average voice usage is over 25 minutes within the first month. The launch is now being expanded to others in the ecosystem. This test program will be progressively upgraded into commercial operations in coming months. 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. However, P/E valuations of 9.6x 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. Page 7 of 11
Reliance Industries Ltd () Other income surges as % of PBT Cash balance increase sequentially 45% 4% 35% Other inc as % of PBT 95, 9, Cash 3% 25% 85, 2% 15% 8, 1% 75, 5% % 7, Revenue and EBIT contribution of refining segment surges 14, 12, 1, Others Oil & Gas Petchem Refining 1, 8, Others Oil & Gas Petchem Refining 8, 6, 6, 4, 4, 2, 2, 2, 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 8 of 11
Reliance Industries Ltd () Financial Summary (Standalone) Y/e 31 Mar () FY15 FY16 FY17E FY17E Revenues 329,76 233,37 245,675 275,222 yoy growth (%) (15.6) (29.2) 5.4 12. Operating profit 31,62 4,18 52,62 61,54 OPM (%) 9.6 17.2 21.2 22.3 Pre exceptional PAT 22,719 27,296 34,96 42,54 Reported PAT 22,719 27,296 34,96 42,54 yoy growth (%) 3.3 2.1 27.9 21.8 EPS (Rs) 7.4 84.5 18.1 131.6 P/E (x) 14.8 12.3 9.6 7.9 Price/Book (x) 1.6 1.4 1.2 1.1 EV/EBITDA (x) 13.1 1.5 7.6 6.1 Debt/Equity (x).4.4.4.3 RoE (%) 11. 12. 13.7 14.6 RoCE (%) 1.4 11.5 13.2 14.4 Page 9 of 11
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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