COMPANY UPDATE RETAIL EQUITY RESEARCH Reliance Industries Ltd (RIL) Integrated Oil & Gas BSE CODE: 500325 NSE CODE: RELIANCE Bloomberg CODE: RIL:IN SENSEX: 33,251 BUY Rating as per Large Ccap 12 month investment period CMP Rs. 902 TARGET Rs. 1000 RETURN 11% 10 th November, 2017 Impressive performance across all business segments RIL is the largest private sector company in India, with businesses in the energy, petrochemicals, textiles, natural resources, retail, and telecommunications. RIL reported 23% YoY increase in EBITDA (in line with our estimates) supported by strong performance in petrochemical segment ( 26% YoY growth in revenue). However, net profit increased at a slower pace of 7.3% YoY due to sharp increase ( 108% YoY) in interest expense on account of higher debt. We expect revenue/net profit to grow at a CAGR of 14%/11% over FY17-19E led by stable GRM and strong growth momentum in the petchem segment. Though Jio surprised positively on revenue front (albeit aided by one-offs) in its first financial reporting, the future performance of it will be a key trigger for the stock price. We believe that long-term investments in upgrading the refining complex and increasing the petrochemicals capacity are key positives. We continue to maintain BUY rating on the stock with a TP of Rs1,000 (SOTP valuation). Operating performance intact RIL reported healthy revenue (standalone) growth of 15% YoY largely on the back of higher crude oil prices. EBITDA increased at a strong pace of 23% YoY (in line with our estimate) supported by performance in petrochemical segment. EBITDA margin increased by 168 bps YoY to 18.1%. However, net profit grew by 7.3% YoY on account of sharp increase ( 108% YoY) in interest expense due to higher debt. Going forward, we expect revenue/net profit to grow at a CAGR of 14%/11% over FY17-19E led by stable gross refining margin (GRM) and strong growth momentum in petchem segment. Stable GRM to drive refining segment Refining throughput increased to 18.1mmt (implied 117% utilization) from 17.3mmt in Q1FY18 and 18.0mmt in Q2FY17. GRM improved marginally on sequential basis to USD12.0/bbl from USD11.9/bbl in Q1FY18 (USD10.1/bbl in Q2FY17). The premium over Singapore complex for the quarter stood at USD3.7/bbl (USD5.0/bbl in Q2FY17 and USD5.5/bbl in Q1FY18) due to lower light heavy and Brent- Dubai differentials. However, we expect GRM to remain strong (in the range of USD11-12/bbl) over FY17-19E as oil demand stays robust with no major capacity addition in sight. Petchem maintains strong growth momentum Petchem segment maintained strong momentum as it reported 26% YoY increase in revenue driven by healthy polyester & PVC spreads and strong performance from downstream core projects. EBIT increased by 42% YoY led by favourable margin and strong volume growth. EBIT margin improved by 205 bps YoY to 18.3%. Going forward, commissioning of grandiose USD20bn core project is likely to bolster RIL s earnings. E&P continues to disappoint Oil & Gas segment continues to witness subdued performance as it reported EBIT loss of Rs96cr in Q2FY18 as the domestic natural gas price remained weak at USD2.8/mmbtu and KG D-6 gas production declined by 28% YoY to 5.4 mmscmd. Shale gas production was also down by 19% YoY due to natural decline and temporary shut-in of wells. Robust traction in retail to sustain Retail business continued to show robust traction as revenue and EBITDA increased by 81% YoY and 64% YoY, respectively. The company continued rapid store additions (45 stores added in Q2FY18) and now operates ~3,679 stores across 750 cities. We believe that current strong growth momentum in retail to sustain given the low penetration of organised retail in the overall retail pie of the country. Jio surprised positively on revenue front aided by one-offs Jio reported stellar revenues of Rs61.5bn led by average revenue per user (ARPU) of Rs156, coming partly from Q1FY18 recharges. Notably, it has recognised bulk of the revenue from Summer Surprise Scheme (Q1FY18) in Q2FY18, propping up ARPU. EBITDA of Rs14.4bn benefited from lower-than-expected opex coupled with capitalization of network and employee expenses. Jio added 15.3 mn net subscribers, taking the overall subscriber base to 138.6 mn. Outlook & Valuation We expect commissioning of downstream units of Refinery off-gas Cracker (RoGC) to boost the petchem performance further. However, a key monitorable for RIL going ahead would be subscriber ramp-up and ARPU in the telecom business with resolution of interconnection congestion issue. Jio has surpassed initial expectations on subscribers and revenue, with strong subscribers addition momentum. Hence, we continue to maintain BUY rating on the stock with a TP of Rs1,000 using sum of the parts (SOTP) valuation methodology wherein we value it standalone business at Rs616 (P/E of 10.0x for FY19E) and investments at Rs384. Company Data Market Cap (cr) Rs. 562,489 Enterprise Value (cr) Rs. 645,595 Outstanding Shares (cr) 633.3 Free Float 50% Dividend Yield 0.6% 52 week high Rs. 958 52 week low Rs. 488 6m average volume (lacs) 0.6 Beta 1.4 Face value Rs. 10 Shareholding (%) Q4FY17 Q1FY18 Q2FY18 Promoters 46.3 46.3 47.6 FII s 20.1 22.4 23.6 MFs/Insti 14.4 12.3 11.7 Public 19.3 19.0 17.1 Others - - - Total 100.0 100.0 100.0 Price Performance 3month 6month 1 Year Absolute Return 12.8% 35.5% 79.3% Absolute Sensex 4.6% 11.1% 22.0% Relative Return* 8.2% 24.4% 57.3% *over or under performance to benchmark index Standalone (Rs.cr) FY17A FY18E FY19E Sales 242,025 274,711 313,000 Growth (%) 3.8% 13.5% 13.9% EBITDA 43,256 49,098 57,412 Margin(%) 17.9 17.9 18.3 PAT Adj 31,425 33,889 38,721 Growth (%) 14.8% 7.8% 14.3% Adj.EPS 49.6 53.5 61.1 Growth (%) 14.8% 7.8% 14.3% P/E 18.2 16.8 14.7 P/B 2.0 1.8 1.6 EV/EBITDA 15.4 13.6 11.5 RoE (%) 11.6 11.2 11.6 D/E 0.4 0.3 0.3
Quarterly Financials (Standalone) Profit & Loss Account (Rs cr) Q2FY18 Q2FY17 YoY Growth % Q1FY18 QoQ Growth % Sales 68,532 59,577 15.0 64,217 6.7 EBITDA 12,983 10,555 23.0 11,589 12.0 Margin (%) 18.9 17.7-18.0 - Depreciation 2,268 2,029 11.8 2,158 5.1 EBIT 10,715 8,526 25.7 9,431 13.6 Interest 1,314 633 107.6 788 66.8 Other Income 2,057 2,280-9.8 1,918 7.2 Exceptional Items - - - - - PBT 11,458 10,173 12.6 10,561 8.5 Tax 3,193 2,469 29.3 2,365 35.0 Reported PAT 8,265 7,704 7.3 8,196 0.8 Adjustment - - - - - Adj PAT 8,265 7,704 7.3 8,196 0.8 No. of shares (cr) 633.3 633.3 0.0 633.3 0.0 EPS (Rs) 13.1 12.2 7.3 12.9 0.8 Segmental Revenue (Rs cr) Q2FY18 Q2FY17 YoY Growth % Q1FY18 QoQ Growth % Petrochemical 26,826 21,293 26.0 24,083 11.4 Refining 59,324 51,838 14.4 58,902 0.7 Oil & Gas 760 701 8.4 582 30.6 Others 311 305 2.0 329-5.5 Gross Turnover 87,221 74,137 17.6 83,896 4.0 Less: Inter segment revenue (12,056) (9,793) - (13,462) - Less: Excise duty recovered (3,404) 0-0 - Net Sales 71,761 64,344 11.5 70,434 1.9 Source: Company, Geojit Research Sum of the parts (SOTP) valuation Particulars Basis Multiple Year Value (Rs Cr) Value/Share RIL (standalone) EPS 10.0x FY19E 390,000 616 Investments Shale Gas Investments 1.0x - 60,000 95 Retail Investments 2.0x - 23,300 37 Telecom Investments 2.0x - 160,000 253 Target Price 1,000
Standalone Financials Profit & Loss Account Sales 329,076 233,158 242,025 274,711 313,000 % change -15.6% -29.1% 3.8% 13.5% 13.9% EBITDA 31,602 39,347 43,256 49,098 57,412 % change 9.6 16.9 17.9 17.9 18.3 Depreciation 8,488 8,590 8,465 9,041 11,003 EBIT 23,114 30,757 34,791 40,057 46,409 Interest 2,367 2,562 2,723 3,908 4,582 Other Income 8,721 7,821 8,709 7,712 8,287 PBT 29,468 36,016 40,777 43,861 50,115 % change 5.9% 22.2% 13.2% 7.6% 14.3% Tax 6,749 8,632 9,352 9,972 11,393 Tax Rate (%) 22.9% 24.0% 22.9% 22.7% 22.7% Reported PAT 22,719 27,384 31,425 33,889 38,721 Adj* - - - - - Adj PAT 22,719 27,384 31,425 33,889 38,721 % change 3.3% 20.5% 14.8% 7.8% 14.3% No. of shares (cr) 325.3 324.0 325.1 633.3 633.3 Adj EPS (Rs) 35.9 43.2 49.6 53.5 61.1 % change -47.0% 20.5% 14.8% 7.8% 14.3% DPS (Rs) 4.6 4.9 5.1 5.5 6.0 Balance Sheet Cash 11,571 6,892 1,754 3,860 13,418 Accounts Receivable 4,661 3,495 5,472 6,141 6,997 Inventories 36,551 28,034 34,018 38,289 43,006 Other Cur. Assets 12,854 12,001 13,131 14,734 16,577 Investments 112,573 157,250 192,450 212,450 232,450 Gross Fixed Assets 236,062 262,232 295,904 345,093 375,093 Net Fixed Assets 114,563 147,543 153,130 193,278 212,276 CWIP 75,753 110,905 134,189 115,000 115,000 Intangible Assets - - - - - Def. Tax (Net) (12,677) (23,747) (24,766) (24,766) (24,766) Other Assets 29,259 15,554 12,602 12,602 12,602 Total Assets 385,108 457,927 521,980 571,589 627,560 Current Liabilities 69,938 96,853 126,221 143,131 161,952 Provisions - - - - - Debt Funds 97,590 107,076 107,446 110,446 113,446 Other Liabilities 1,404 - - - - Equity Capital 3,253 3,240 3,251 6,333 6,333 Reserves & Surplus 212,923 250,758 285,062 311,679 345,829 Shareholder s Fund 216,176 253,998 288,313 318,012 352,162 Total Liabilities 385,108 457,927 521,980 571,589 627,560 BVPS (Rs) 341.3 401.1 455.3 502.2 556.1 Cash flow Pre-tax profit 29,468 36,016 40,777 43,861 50,115 Depreciation 8,488 8,590 8,465 9,041 11,003 Changes in W.C 8,315 14,947 19,533 10,366 11,406 Others (4,904) (7,977) (7,765) (3,804) (3,705) Tax paid (6,082) (8,129) (9,560) (9,972) (11,393) C.F.O 35,285 43,447 51,450 49,493 57,424 Capital exp. (42,720) (20,216) (30,266) (30,000) (30,000) Change in inv. (23,403) (113) 10,174 (20,000) (20,000) Other invest.cf 10,125 (20,894) (34,857) 7,712 8,287 C.F - investing (55,998) (41,223) (54,949) (42,288) (41,713) Issue of equity 243 291 696 - - Issue/repay debt 5,453 4,441 3,020 3,000 3,000 Dividends paid (3,268) (7,259) - (4,190) (4,571) Other finance.cf (3,368) (4,376) (5,355) (3,908) (4,582) C.F - Financing (940) (6,903) (1,639) (5,099) (6,153) Chg. in cash (21,653) (4,679) (5,138) 2,106 9,558 Closing cash 11,571 6,892 1,754 3,860 13,418 Ratios Y.E March FY15A FY16A FY17A FY18E FY19E Profitab. & Return EBITDA margin (%) 9.6 16.9 17.9 17.9 18.3 EBIT margin (%) 7.0 13.2 14.4 14.6 14.8 Net profit mgn.(%) 6.9 11.7 13.0 12.3 12.4 ROE (%) 11.0 11.6 11.6 11.2 11.6 ROCE (%) 10.6 11.4 11.5 11.6 12.2 W.C & Liquidity Receivables (days) 5.0 5.1 7.5 7.5 7.5 Inventory (days) 46.3 56.0 66.3 65.8 65.2 Payables (days) 66.8 102.7 125.2 125.2 125.1 Current ratio (x) 0.9 0.5 0.4 0.4 0.5 Quick ratio (x) 0.4 0.2 0.2 0.2 0.2 Turnover &Levg. Gross asset T.O (x) 1.4 0.9 0.9 0.9 0.9 Total asset T.O (x) 0.9 0.5 0.5 0.5 0.5 Int. covg. ratio (x) 0.5 0.4 0.4 0.3 0.3 Valuation ratios EV/Sales (x) 2.0 2.9 2.8 2.5 2.1 EV/EBITDA (x) 20.8 17.1 15.6 13.8 11.7 P/E (x) 25.1 20.8 18.2 16.8 14.7 P/BV (x) 2.6 2.2 2.0 1.8 1.6
Recommendation Summary (last 3 years) Dates Rating Target 16 January 2015 HOLD 456 17 March 2015 BUY 490 06 July 2015 BUY 561 21 October 2015 BUY 524 13 January 2016 BUY 571 10 February 2017 BUY 610 28 April 2017 BUY 792 10 November 2017 BUY 1000 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap; Buy - Upside is above 10%. Buy - Upside is above 15%. Hold - Upside is between 0% - 10%. Accumulate - Upside is between 10% - 15%. Reduce - Downside is more than 0%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit's research desk has reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Kaushal Patel, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion.
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