April 20, 2015 Neutral Reliance Industries Industry : Oil & Gas Result Update Operational performance in line with estimate, lower interest cost boosts Q4 profit RIL s Q4FY15 operating profit (standalone) of Rs86.3bn was inline with our estimate. However, net profit of Rs62.4bn was higher than our estimate of Rs59.5bn on account of lower interest cost. During the quarter RIL s refining vertical displayed a stellar performance with GRM of $10.1/bbl (yoy +0.8, qoq +$2.8/bbl) driven by wider auto fuel and naphtha spreads and lower fuel costs. Its difference over Singapore complex GRM widened sequentially from $1/bbl to $1.6/bbl. Petchem performance stabilized during the quarter with the vertical reporting EBIT of Rs21.2bn (yoy +1.2% qoq -3.4%). Petchem EBIT margin of the quarter improved by 197bps yoy to 10.6% due to firm polymer and polyester deltas. Gas production from KG-D6 decreased sequentially to 11.6mmscmd (yoy/qoq -1.9, 0.2mmscmd). Other income increased by 4.8% qoq to Rs21.3bn (26% of PBT) while Interest cost declined by 49.4% yoy due to lower exchange rate during the quarter. We maintain our NEUTRAL rating on the stock with a revised target price of Rs906. At the CMP, the stock is trading at 11.4x and 8.2x FY17e earnings and EV/EBITDA respectively. Net revenues for the quarter decreased by 41.1% yoy RIL s Q4FY15 net revenues stood at Rs560bn (yoy -41.1%, qoq -30.1%). Refining revenues during the quarter decreased by 44.5% yoy to Rs486bn (qoq -33.5%) due to 50% yoy decline witnessed in crude oil price (Brent). Crude throughput stood at 16.2mnt down 8.5% qoq due to planned turnaround during the quarter. Capacity utilisation stood at 105%. Petchem revenues for the quarter too decreased by 17.6% yoy to Rs200bn due to fall in petchem product prices. The Oil and Gas segment revenue witnessed a decline of 13.7% yoy to Rs12.2bn due to fall in crude oil prices and falling production of both oil and gas. Gas production from KG-D6 declined to 11.9mmscmd (yoy/qoq -1.9, 0.2mmscmd). Stellar performance by refining vertical, petchem holds the fort RIL s Q4FY15 operating profit for the quarter increased by 3.6% yoy to Rs86.3bn which was in line with our estimate. RIL s operating profit growth was mainly driven by strong performance by its refining vertical. During the quarter RIL s refining GRM grew by $10.1/bbl (yoy +0.8, qoq +$2.8/bbl) driven by wider auto fuel and naphtha spreads and lower fuel costs. Its difference over Singapore complex GRM widened sequentially from $1/bbl to $1.6/bbl. Consequently, refining EBIT for the quarter grew by 19.5% yoy to Rs47.3bn (qoq +47.8%). Petchem performance stabilized during the quarter with the vertical reporting EBIT of Rs21.2bn (yoy +1.2% qoq - 3.4%) which was 4.8% higher than our estimate. Petchem EBIT margin for the quarter improved by 197bps yoy to 10.6% due to firm polymer and polyester deltas. Oil and Gas EBIT for the quarter decreased by 56.6% yoy to Rs1.64bn due to lower production and fall in crude oil price. Stock Data Current Market Price (Rs) 927 Target Price (Rs) 906 Potential upside (%) (2) Reuters Bloomberg What s Changed RELI.BO RIL IN 12 month PriceTarget (Rs) From Rs 904 to Rs 906 FY2016 EPS (Rs) From Rs 77.8 to Rs 73.9 FY2017 EPS (Rs) Key Data NA Market Cap (Rs bn) 2,989 52-Week Range (Rs) 1,143 / 797 Avg Dly Trading Value last 6 mts (Rs.mn) 3,408 Promoters (%) 45.25 FII Holding (%) 18.90 DII Holding (%) 12.00 Public & Others Holding (%) 23.85 Fiscal YE YE Mar FY14 FY15 FY16e FY17e Total sales(rs bn) 4,345 3,754 2,828 3,162 EBITDA margins(%) 8.0 10.0 14.5 14.1 PAT margins(%) 5.2 6.3 8.5 8.3 EPS(Rs) 69.6 72.8 73.9 81.4 P/E(x) 13.3 12.7 12.6 11.4 P/BV(x) 1.5 1.4 1.3 1.1 EV/EBITDA(x) 10.4 11.2 9.7 8.2 ROE(%) 11.8 11.3 10.5 10.5 ROCE(%) 9.2 8.0 7.4 7.6 Dividend yield( %) 0.9 1.0 1.0 1.0 Relative Price Performance 140 120 100 80 60 Apr-14 Aug-14 Dec-14 Apr-15 Reliance Ind One Year Indexed S&P Bse Sensex (%) 1 Month 3 Months 12 Months Absolute 8 7 (3) BSE Relative 9 6 (28) Chirag Dhaifule chirag@lkpsec.com +91 22 6635 1220 Disclaimer: The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and is for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company makes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. LKP Securities Ltd., and affiliates, including the analyst who have issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage o compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions. 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Actual v/s Estimates Revise our target price to Rs904 We expect the refining business to face headwinds going forward on account of higher global capacity additions compared to demand. Lack of demand growth has weighed down on RIL s other key business vertical petchem. To our mind, lack of demand growth would have a negative impact on RIL s petchem margins. RIL s upstream foray has been reeling under uncertainty with gas production from KG D6 falling to 11.6mmscmd. Add to it the uncertainty with respect to quantum and timing of gas price increase would further weigh down on the valuation of its domestic E&P business. We maintain our NEUTRAL rating on the stock with a revised target price of Rs906. At the CMP, the stock is trading at 11.4x and 8.2x FY17e earnings and EV/EBITDA respectively. Deviation Y/E, Mar (Rs. m) Q4FY15 Q3FY15 qoq (%) Q4FY14 yoy (%) LKP Estimates (%/bps) Revenue 560,430 801,960-30.1% 951,930-41.1% 764,676-26.7% EBITDA 86,290 72,080 19.7% 83,310 3.6% 85,784 0.6% EBITDA (%) 15.4% 9.0% 641 bps 8.8% 665 bps 11.2% 418 bps PAT 62,430 50,850 22.8% 56,310 10.9% 59,474 5.0% Result Table Y/E, Mar (Rs. mn) Q4FY14 Q3FY15 Q4FY15 yoy (%) qoq (%) FY14 FY15 yoy (%) Net Revenue 951,930 801,960 560,430-41.1% -30.1% 3,901,170 3,290,760-15.6% Raw Material Consumption 798,590 634,500 373,700-53.2% -41.1% 3,297,250 2,579,410-21.8% Purchase of products 130 19,510 17,310 13215.4% -11.3% 5,240 71,340 1261.5% Employee Cost 9,480 8,320 9,930 4.7% 19.4% 33,700 36,860 9.4% Other Expenditure 60,420 67,550 73,200 21.2% 8.4% 256,210 287,130 12.1% Total Operating Costs 868,620 729,880 474,140-45.4% -35.0% 3,592,400 2,974,740-17.2% EBITDA 83,310 72,080 86,290 3.6% 19.7% 308,770 316,020 2.3% EBITDA (%) 8.8% 9.0% 15.4% 665bps 641bps 7.9% 9.6% 169bps Depreciation 22,750 21,050 21,320-6.3% 1.3% 87,890 84,880-3.4% Interest 7,990 8,810 4,040-49.4% -54.1% 32,060 23,670-26.2% Other Income 20,360 24,020 21,330 4.8% -11.2% 89,360 87,210-2.4% PBT 72,930 66,240 82,260 12.8% 24.2% 278,180 294,680 5.9% Tax 16,620 15,390 19,830 19.3% 28.8% 58,340 67,490 15.7% Tax Rate (%) 22.8% 23.2% 24.1% 132bps 87bps 21.0% 22.9% 193bps Adj PAT 56,310 50,850 62,430 11% 23% 219,840 227,190 3.3% Rep PAT 56,310 50,850 62,430 10.9% 22.8% 219,840 227,190 3.3% Shares outstanding (mn) 3,232 3,235 3,236 3,232 3,236 Reported EPS (Rs) 17.4 15.7 19.3 10.7% 22.7% 68.0 70.2 3.2% Segmental Breakup Y/E, Mar (Rs. mn) Q4FY14 Q3FY15 Q4FY15 yoy (%) qoq (%) FY14 FY15 yoy (%) Segment Revenue Petrochemicals 243,430 213,060 200,560-17.6% -5.9% 964,650 900,090-6.7% Refining 876,240 731,520 486,390-44.5% -33.5% 3,619,700 3,045,700-15.9% Oil & Gas 14,170 13,470 12,230-13.7% -9.2% 60,680 55,070-9.2% Others 3,940 3,730 3,680-6.6% -1.3% 15,490 11,550-25.4% Segment EBIT Petrochemicals 20,960 21,970 21,220 1.2% -3.4% 86,120 86,070-0.1% Refining 39,540 31,990 47,270 19.5% 47.8% 132,200 154,870 17.1% Oil & Gas 3,780 2,670 1,640-56.6% -38.6% 16,260 12,500-23.1% Others 1,990 740 1,240-37.7% 67.6% 4,190 3,160-24.6% EBIT Margins Petrochemicals 8.6% 10.3% 10.6% 197bps 27bps 8.9% 9.6% 63bps Refining 4.5% 4.4% 9.7% 521bps 535bps 3.7% 5.1% 143bps Oil & Gas 26.7% 19.8% 13.4% -1327bps -641bps 26.8% 22.7% -410bps Others 50.5% 19.8% 33.7% -1681bps 1386bps 27.0% 27.4% 31bps LKP Research 2
Refining GRM increases to $10.1/bbl Refining revenues during the quarter decreased by 44.5% yoy to Rs486bn (qoq -33.5%) due to 50% yoy decline witnessed in crude oil price (Brent). During the quarter, crude throughput stood at 16.2mnt down 8.5% qoq due to planned turnaround. RIL s refining GRM grew by $10.1/bbl (yoy +0.8, qoq +$2.8/bbl) driven by wider auto fuel and naphtha spreads and lower fuel costs. RIL s difference over Singapore complex GRM widened sequentially from $1/bbl to $1.6/bbl. Consequently, refining EBIT for the quarter grew by 19.5% yoy to Rs47.3bn (qoq +47.8%). RIL s GRM at $10.1/bbl increased by $2.8/bbl on sequential basis 12.0 ($/bbl) 10.0 8.0 6.0 4.0 2.0 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 RIL GRM Singapore Complex GRM RIL s Q4FY15 crude throughput was lower due to planned turnaround during the quarter 18 118% 115% 17 112% 109% 16 106% 103% 15 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 100% Crude Processed (mmt) RIL's Refinery Utilization Rate LKP Research 3
Petchem performance during the quarter supported by firm polymer and polyester deltas Petchem revenues for the quarter decreased by 17.6% yoy to Rs200bn due to fall in petchem product prices. Petchem performance stabilized during the quarter with the vertical reporting EBIT of Rs21.2bn (yoy +1.2% qoq -3.4%) Petchem EBIT was 4.8% higher than our estimate. EBIT margin for the quarter improved by 197bps yoy to 10.6% due to firm polymer and polyester deltas. Petchem margin increased by 27bps sequentially to 10.6% 30 (Rs bn) 12% 25 11% 20 10% 15 9% 10 8% 5 7% 0 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 6% Petrochemicals EBIT (Rs bn) Petrochemicals EBIT (%) Petchem volumes trend 5.8 (mmt) 5.6 5.4 5.2 5.0 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 LKP Research 4
Upstream business affected by lower gas production from KG D6 and lower oil price Gas production from KG-D6 averaged 11.6mmscmd during Q4FY15 as against 11.9mmscmd in Q3FY15. Total gas production (incl PMT) averaged 18mmscmd during the quarter. Crude oil production from KG-D6 decreased by 25.9% yoy to 4,778bpd (qoq - 12.1%) while oil production from PM field declined by 6.5% yoy to 17.7kbpd. PMT fields continue to grapple with natural declines. Oil and Gas EBIT for the quarter decreased by 38.6% qoq to Rs1.64bn due to lower production and fall in crude oil price. We have modeled gas production at 15mmscmd and gas price of $5mmbtu for FY16e/17e. KG-D6 gas production at 11.6mmscmd Prodn at PM lower due to natural decline 20 7,000 6.0 24,000 15 6,000 5.5 22,000 5.0 10 5,000 4.5 20,000 5 4,000 Q4FY13 Q2FY14 Q4FY14 Q2FY15 Q4FY15 4.0 18,000 Q3FY13 Q1FY14 Q3FY14 Q1FY15 Q3FY15 KG - D6 Gas Prodn (mmscmd) KG - D6 Oil Prodn (bpd) PM Gas Prodn (mmscmd) PM Oil Prodn (bpd) Tapti gas prodn continues to fall due to natural decline E&P segment EBIT at Rs1.6bn in Q4FY15 3.0 1,600 6 5.4 2.0 1,200 5 4 4.6 3.5 3.6 3.8 4.9 3.3 800 3 2.7 1.0 2 1.6 400 1 0.0 0 Q4FY13 Q2FY14 Q4FY14 Q2FY15 Q4FY15 Tapti Gas Prodn (mmscmd) Tapti Condensate Prodn (bpd) 0 Q4FY13 Q2FY14 Q4FY14 Q2FY15 Q4FY15 Oil & Gas EBIT (Rs bn) LKP Research 5
Valuation & View We expect the refining business to face headwinds going forward on account of higher global capacity additions compared to demand. Lack of demand growth has weighed down on RIL s other key business vertical petchem. This, to our mind, would maintain pressure on RIL s petchem margins. RIL s upstream foray has been reeling under uncertainty with gas production from KG D6 falling to 11.6mmscmd. Add to it the uncertainty with respect to quantum and timing of gas price increase would further weigh down on the valuation of its domestic E&P business. We value RIL using SOTP method valuing each of its businesses separately. We have valued RIL s Refining and Petrochemicals business using EV/EBITDA. To value the E&P business, we have valued the producing and developing assets on NPV basis. Other new ventures have been valued at book value or acquisition cost as they are still in a nascent stage and some time away from any meaningful contribution to the company. SOTP valuation - FY17e basis We maintain our NEUTRAL rating on the stock with a revised target price of Rs906. At the CMP, the stock is trading at 11.4x and 8.2x FY17e earnings and EV/EBITDA respectively. Business Segments Method Multiple Value (Rs mn) EV (Rs mn) (Rs/sh) Refining EV/EBITDA 7.5x 206,220 1,546,651 526 Petrochemicals EV/EBITDA 7.5x 152,086 1,140,647 388 E&P business NPV & EV/boe 214,077 73 Shale Gas Assets EV/boe 177,369 60 Retail Book Value 1x 112,510 112,510 38 SEZ Book Value 1x 49,910 49,910 17 Infotel Book Value 1x 230,446 230,446 78 Total EV 3,471,612 1,180 Net Debt / (Cash) 805,820 274 Equity Value 2,665,791 906 CMP 927 Upside / (Downside) -2% LKP Research 6
Financials Income statement Y/E, Mar (Rs. m) FY14 FY15 FY16e FY17e Net Sales 4,344,600 3,754,350 2,827,891 3,162,431 yoy (%) 9.4% -13.6% -24.7% 11.8% Raw Materials Exp 3,459,310 2,683,450 1,847,535 2,106,806 Purch - traded goods 170,910 257,010 233,891 241,061 Mfg Exp 167,102 203,119 149,160 165,896 Gross Profit 547,278 610,771 597,305 648,667 Employee Cost 55,720 62,620 50,675 54,380 Other Expenditure 143,568 174,511 135,419 147,544 Total Expenditure 3,996,610 3,380,710 2,416,680 2,715,688 EBITDA 347,990 373,640 411,211 446,743 EBITDA margin 8.0% 10.0% 14.5% 14.1% yoy (%) 5.3% 7.4% 10.1% 8.6% Depreciation 112,010 115,470 146,856 151,581 Core EBIT 235,980 258,170 264,355 295,162 Core EBIT margin 5.4% 6.9% 9.3% 9.3% Other Income 89,110 84,950 85,950 86,950 EBIT 325,090 343,120 350,305 382,112 EBIT margin 7.5% 9.1% 12.4% 12.1% Interest 38,360 33,160 35,463 35,463 PBT 286,730 309,960 314,842 346,650 Tax 62,150 74,740 75,858 83,143 Tax rate (%) 21.7% 24.1% 24.1% 24.0% Adj PAT 224,580 235,220 238,984 263,507 Minority Interest -350-440 0 0 Adj PAT after MI 224,930 235,660 238,984 263,507 EOIs 0 0 0 0 Reported PAT 224,930 235,660 238,984 263,507 Cash Flow Y/E, Mar (Rs. m) FY14 FY15 FY16e FY17e Profit after Tax 224,930 235,660 238,984 263,507 Add : Depreciation 112,010 115,470 146,856 151,581 Add : Non cash -22,500 29,300 0 0 Add : Misc exp w/off 0 0 0 0 changes in Inventory -13,960 27,490 102,903-37,158 changes in debtors 3,390 40,960 13,122-4,738 changes in other CA -14,710-440 1,540-556 changes in L & A -84,810-27,480 117,022-42,256 changes in CL & prov 186,410 246,610-260,996 94,244 Net changes in WC 76,320 287,140-26,408 9,536 CFO 390,760 667,570 359,432 424,623 Capital expenditure -606,730-1,015,560-147,560-35,960 Investments -184,770-151,260 0 0 CFI -791,500-1,166,820-147,560-35,960 Increase in debt 308,660 280,420 0 0 Issue of Shares 40 30 0 0 Share Premium 0 0 0 0 dividend paid -32,680-35,590-35,590-35,590 CFF 276,020 244,860-35,590-35,590 Net cash generated -124,720-254,390 176,282 353,073 Opening balance 504,560 379,840 125,450 301,732 Closing balance 379,840 125,450 301,732 654,805 Free Cash flow -215,970-347,990 211,872 388,663 Balance sheet Y/E, Mar (Rs. m) FY14 FY15 FY16e FY17e Equity share capital 29,400 29,430 29,430 29,430 Reserves & surplus 1,957,470 2,155,560 2,358,954 2,586,871 Networth 1,986,870 2,184,990 2,388,384 2,616,301 Minority Interest 9,590 30,380 30,380 30,380 Secured Loans 94,531 120,564 120,564 120,564 Unsecured Loans 923,729 1,178,116 1,178,116 1,178,116 Loan Funds 1,018,260 1,298,680 1,298,680 1,298,680 Total Liabilities 3,014,720 3,514,050 3,717,444 3,945,361 Gross Block 3,246,420 4,261,980 4,409,540 4,445,500 Less: Depreciation 1,170,940 1,286,410 1,433,266 1,584,846 Net block 2,075,480 2,975,570 2,976,274 2,860,654 Capital WIP 253,630 253,630 253,630 253,630 Investment 613,250 764,510 764,510 764,510 Current Assets 1,346,070 1,051,150 992,844 1,430,626 Inventories 559,970 532,480 429,577 466,735 Sundry debtors 94,110 53,150 40,028 44,766 Cash & bank bal 379,840 125,450 301,732 654,805 Other assets 32,540 32,980 31,440 31,996 Loans & advances 279,610 307,090 190,068 232,324 Curr. Liab & Prov 1,154,460 1,401,070 1,140,074 1,234,319 Current liabilities 1,107,100 1,331,610 1,088,233 1,176,115 Provisions 47,360 69,460 51,842 58,204 Net current assets 191,610-349,920-147,230 196,307 Net Def tax liability -119,250-129,740-129,740-129,740 Misc expenditure 0 0 0 0 Total Assets 3,014,720 3,514,050 3,717,444 3,945,361 Ratios Y/E, Mar FY14 FY15 FY16e FY17e Profitability Gross profit margin 12.6% 16.3% 21.1% 20.5% EBITDA margin 8.0% 10.0% 14.5% 14.1% Core EBIT margin 5.4% 6.9% 9.3% 9.3% APAT margin 5.2% 6.3% 8.5% 8.3% Tax Rate 21.7% 24.1% 24.1% 24.0% Per Share (Rs) EPS 69.6 72.8 73.9 81.4 CEPS 104.3 108.5 119.2 128.3 Book Value Per Share 614.7 675.2 738.1 808.5 Dividend Per Share 8.7 9.5 9.5 9.5 Valuations Ratios (x) PER 13.3 12.7 12.6 11.4 P/CEPS 8.9 8.5 7.8 7.2 P/BV 1.5 1.4 1.3 1.1 EV/EBITDA 10.4 11.2 9.7 8.2 EV/Sales 0.8 1.1 1.4 1.2 M-Cap/EBITDA 8.6 8.0 7.3 6.7 M-Cap/sales 0.7 0.8 1.1 0.9 Financial ratios ROCE 9.2% 8.0% 7.4% 7.6% ROIC 12.2% 9.4% 8.4% 9.4% ROE 11.8% 11.3% 10.5% 10.5% Debt/Equity 0.51 0.59 0.54 0.50 Dividend yield (%) 0.9% 1.0% 1.0% 1.0% Growth Net Sales 9.4% -13.6% -24.7% 11.8% EBITDA 5.3% 7.4% 10.1% 8.6% Core EBIT 8.2% 9.4% 2.4% 11.7% APAT after Min int 7.7% 4.8% 1.4% 10.3% LKP Research 7
Team LKP Pratik Doshi Director 98210 47676 pratik_doshi@lkpsec.com S. Ranganathan Head of Research 98701 22510 6635 1270 s_ranganathan@lkpsec.com Ashwin Patil Research Analyst 98195 78395 6635 1271 ashwin_patil@lkpsec.com Chirag Dhaifule Research Analyst 98679 80172 6635 1220 chirag@lkpsec.com Hardik Mehta Sales 98190 66569 6635 1246 hardik_mehta@lkpsec.com Varsha Jhaveri Sales 93241 47566 6635 1296 varsha_jhaveri@lkpsec.com Hitesh Doshi Sales 93222 45130 6635 1281 hitesh_doshi72@lkpsec.com Bharat Shah Dealing 98337 97256 6635 1210 bharat_shah@lkpsec.com Kaushik Doshi Dealing 93205 23595 6635 1207 kaushik_doshi@lkpsec.com LKP Securites Ltd, 13th Floor, Raheja Center, Free Press Road, Nariman Point, Mumbai-400 021. Tel -91-22 - 66351234 Fax- 91-22-66351249. www.lkpsec.com