INDUSTRY OIL & GAS Timing is everything COMPANY UPDATE 1 OCT 2014 Reliance Industries BUY CMP (as on 30 Sep 2014) Rs 945 Target Price Rs 1,100 Nifty 7,965 Sensex 26,631 KEY STOCK DATA Bloomberg/Reuters RIL IN/RELI.BO No. of Shares (mn) 3,232 MCap (Rs bn) / ($ mn) 3,059/49,581 6m avg traded value (Rs mn) 3,869 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,145/793 3M 6M 12M Absolute (%) (6.9) 1.6 15.0 Relative (%) (11.7) (17.4) (22.4) SHAREHOLDING PATTERN (%) Promoters 45.29 FIs & Local MFs 10.94 FIIs 19.91 Public & Others 23.86 Source : BSE Satish Mishra satish.mishra@hdfcsec.com +91-22-6171-7334 Reliance Industries has underperformed NIFTY by ~24% post the formation of the new Indian government. Most of this can be attributed to the concerns around its Indian upstream business (~11% of PBIT in FY14, from 27% in FY11) and its massive USD 12bn investment in telecom. We met RIL s management to get an update on the ongoing ~USD 13bn capex in the core (petchem and refining) business and outlook on other segments. We believe CMP factors in most negatives related to E&P. We think it is the pricing regime/policy that matters more than the current gas price reset. Meanwhile, there is much sharper visibility on a quantum jump in EBITDA to ~Rs 500bn in FY17E (~60% higher than FY14), driven by investments in the core refining/petchem business. Moreover, this is almost immune to policy shifts. While FY15/16 should see initial benefits of capacity adds in polyester and intermediates, FY17 can see a quantum shift. Our estimate is that ~80% benefit of the petchem/polyesters capex will be visible in FY17. Importantly, we sensed confidence on commissioning schedule. Finally, FY18 should see the remaining ~20% benefit from capex plus the imported ethane impact on petchem feed mix. We remain positive on RIL on the back of productive capex in the core business. Our SOTP for RIL is Rs 1,100/sh. Maintain BUY. There are more reasons to like RIL : (1) Retail has achieved critical mass and was PAT positive in FY14. Management expects ~30% EBITDA CAGR (2) Positive outlook for domestic upstream assets ex-kgd6 (Rseries/Satellite fields) (3) Ramp up in shale gas volumes in the US (4) Strong balance sheet (cons net D/E at 0.3). Imported ethane : RIL is incurring a capex of USD 1.6bn to import ethane as cracker feed to replace high cost domestic gas/naphtha. We expect additional EBITDA of ~USD 0.5bn/yr from FY18 onwards. Capex on track : Ongoing US$ 13bn capex (~$ 5bn spent till FY14) is broadly on track. All projects will be commissioned by FY16 end. We expect EBITDA to jump to ~Rs 500bn in FY17 (~60% over FY14 EBITDA) and to ~Rs 550bn in FY18. Key risk - rising investments in telecom : RIL has invested USD 6bn in telecom till FY14. Co has guided for additional capex of ~USD 6bn. We think it is difficult to ascertain returns on these investments. FINANCIAL SUMMARY (STANDALONE) (Rs bn) FY13 FY13 FY14 FY15E FY16E Net Sales 3,299.04 3,602.97 3,901.18 4,093.52 4,307.51 EBITDA 336.19 307.87 308.78 353.69 394.11 PAT 200.40 210.03 219.85 254.78 276.50 Dil EPS (Rs) 62.0 65.0 68.0 78.8 85.6 P/E (x) 15.2 14.5 13.9 12.0 11.0 EV/EBITDA (x) 9.1 9.9 9.9 8.6 7.7 RoE (%) 12.6 12.1 11.7 12.3 12.0 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Strong GRM due to higher global incremental demand and delay in new capacities We have assumed gas price hike from 2HFY15 Polyester/intermediate capacity will come in steps ASSUMPTIONS FY12 FY13 FY14 FY15E FY16E FY17E Crude price (USD/bbl) 109.9 107.1 107.0 105.0 105.0 105.0 INR-USD 47.9 54.4 60.5 60.0 60.0 60.0 Refining business GRM (USD/bbl) 8.6 9.2 8.1 8.5 8.5 11.1 Crude thruput (mmt) 67.7 68.5 68.0 68.8 68.8 68.8 Upstream business PMT Gas (BCF) 145 115 93 87 83 79 Oil (mmbbl) 11 9 8 8 8 8 PM Gas price (USD/mmbtu) 5.7 5.7 5.7 5.7 5.7 5.7 Tapti Gas price (USD/mmbtu) 5.6 5.6 5.6 5.6 5.6 5.6 KG Gas (mmscmd) 43 26 14 15 17 21 Gas price (USD/mmbtu) 4.2 4.2 4.2 5.7 7.2 7.2 Petrochemicals Sales volume (mmt) 9.0 8.9 9.0 10.2 12.0 14.0 Source : Company, HDFC sec Inst Research SOTP VALUATION Business EBITDA (Rs bn) Multiple Value (Rs bn) Value* (Rs/sh) Valuation Basis Petrochemicals 162 6.5 1,054 361 EV/EBIDTA on FY16E Refining 189 6.5 1,227 420 EV/EBIDTA on FY16E E & P PMT 17 4.0 69 24 EV/EBIDTA on FY16E KG D6 gas 245 84 NPV NEC 46 16 NPV CBM 87 30 NPV Shale gas 1.0 420 144 x Investments Investments in Retail 1.0 100 34 x Investments Investments in Telecom 0.7 252 86 x Investments CWIP 1.0 327 112 As on Mar-14 Consolidated Net Debt 614 (210) As on Mar-14 Value per share 1,100 Source : Company, HDFC sec Inst Research * Valuation is based on 656 mn shares (net of treasury shares) Page 2
STANDALONE INCOME STATEMENT Revenues 3,299.04 3,602.97 3,901.18 4,093.52 4,307.51 Growth % 32.9 9.2 8.3 4.9 5.2 Raw material 2,753.83 3,082.27 3,375.61 3,518.90 3,688.16 Employee cost 28.62 30.62 32.77 35.06 37.51 Other expenses 180.40 182.20 184.03 185.87 187.72 EBITDA 336.19 307.87 308.78 353.69 394.11 EBIDTA margin (%) 10.2 8.5 7.9 8.6 9.1 EBITDA growth % (11.8) (8.4) 0.3 14.5 11.4 Depreciation, Depletion, Impairment 113.94 94.65 87.89 83.34 92.97 Other income 61.92 79.98 89.36 82.89 86.38 EBIT 284.17 293.20 310.25 353.24 387.52 Finance charges 26.67 30.36 32.06 24.50 30.75 PBT 257.50 262.84 278.19 328.75 356.77 Provision for taxes 57.10 52.81 58.34 73.97 80.27 PAT 200.40 210.03 219.85 254.78 276.50 EPS 62.0 65.0 68.0 78.8 85.6 EPS Growth % (1.2) 4.8 4.7 15.9 8.5 STANDALONE BALANCE SHEET SOURCES OF FUNDS Share Capital 32.71 32.29 32.32 32.32 32.32 Reserves and surplus 1,628.25 1,767.91 1,938.59 2,153.66 2,384.78 Total Equity 1,660.96 1,800.20 1,970.91 2,185.98 2,417.10 Short Term debt 105.93 115.11 227.70 277.70 327.70 Long Term debt 480.34 430.12 627.11 827.11 1,027.11 Total Debt 586.27 545.23 854.81 1,104.81 1,354.81 Deferred tax liability 121.22 121.93 122.15 122.15 122.15 TOTAL SOURCES OF FUNDS 2,368.45 2,467.36 2,947.87 3,412.94 3,894.06 APPLICATION OF FUNDS Net fixed assets 1,137.23 829.62 804.24 992.53 1,079.56 Intangible assets 40.59 267.86 289.82 289.82 289.82 Capital WIP 36.95 135.25 326.73 456.73 666.73 Intangibles WIP - 55.91 90.43 90.43 90.43 Long Term Loans and Advances 143.40 215.28 284.36 284.36 284.36 Investments 261.64 241.43 526.92 586.92 646.92 Inventories 359.55 427.29 429.32 448.60 472.06 Debtors 184.24 118.80 106.64 111.90 117.75 Cash and Cash equivalent 674.42 779.13 665.94 653.64 774.81 ST Loans and Advances 110.89 109.74 146.77 146.77 146.77 Other Current Assets 2.49 4.80 4.66 4.66 4.66 Total Current Assets 1,331.59 1,439.76 1,353.33 1,365.57 1,516.04 Creditors 403.24 457.87 578.62 504.68 531.06 Other Current Liabilities 137.13 216.40 107.67 107.67 107.67 Provisions 42.58 43.48 41.67 41.07 41.07 Total Current Liabilities 582.95 717.75 727.96 653.42 679.80 Net Current Assets 748.64 722.01 625.37 712.15 836.24 TOTAL APPLICATION OF FUNDS 2,368.45 2,467.36 2,947.87 3,412.94 3,894.06 Page 3
STANDALONE CASH FLOW Reported PAT 200.40 210.03 219.85 254.78 276.50 Other income (net of tax) (61.88) (79.93) (89.31) (82.84) (86.33) PAT FROM OPERATIONS 138.52 130.10 130.54 171.94 190.17 Depreciation 113.94 94.65 87.89 83.34 92.97 Interest 26.67 30.36 32.06 24.50 30.75 Working capital change (107.89) 59.46 (83.10) (99.08) (2.92) OPERATING CASH FLOW 171.24 314.57 167.39 180.69 310.97 Capex 220.65 (168.52) (310.47) (401.63) (390.00) Free Cash Flow to Firm 391.89 146.05 (143.08) (220.94) (79.03) Investments (285.35) (85.84) (169.68) (60.00) (60.00) Other income (net of tax) 61.88 79.93 89.31 82.84 86.33 INVESTING CASH FLOW (2.82) (174.43) (390.84) (378.79) (363.67) Capital issuance - - - - - Debt issuance (89.58) (41.04) 309.58 250.00 250.00 Interest (26.67) (30.36) (32.06) (24.50) (30.75) Dividend (30.65) (32.61) (34.16) (39.71) (45.38) FINANCING CASH FLOW (146.90) (104.01) 243.36 185.80 173.88 NET CASH FLOW 21.52 36.13 19.91 (12.30) 121.17 Closing cash 674.42 779.13 665.94 653.64 774.81 STANDALONE KEY RATIOS FY12 FY13 FY14 FY15E FY16E PROFITABILITY % EBITDA Margin 10.2 8.5 7.9 8.6 9.1 EBIT Margin 8.6 8.1 8.0 8.6 9.0 APAT Margin 6.1 5.8 5.6 6.2 6.4 RoE 12.6 12.1 11.7 12.3 12.0 Core RoCE 9.6 10.1 8.8 8.3 7.9 RoCE 9.5 9.7 9.1 8.6 8.2 EFFICIENCY Tax rate % 22.2 20.1 21.0 22.5 22.5 Total Asset turnover (x) 1.5 1.6 1.5 1.3 1.2 Inventory (days) 40 43 40 40 40 Debtor (days) 20 12 10 10 10 Payables (days) 45 46 54 45 45 Cash conversion cycle (days) 16 9 (4) 5 5 Net Debt/EBITDA (x) (0.2) (0.8) 0.6 1.3 1.5 Net D/E (0.0) (0.1) 0.1 0.2 0.2 Interest coverage 10.7 9.7 9.7 14.4 12.6 PER SHARE DATA EPS (Rs) 62.0 65.0 68.0 78.8 85.6 CEPS (Rs) 96.0 94.0 95.2 104.6 114.3 DPS (Rs) 8.5 9.0 9.5 10.5 12.0 BV (Rs) 507.3 555.6 609.8 676.4 747.9 VALUATION P/E (x) 15.2 14.5 13.9 12.0 11.0 P/Cash EPS (x) 9.8 10.0 9.9 9.0 8.3 P/BV (x) 1.9 1.7 1.5 1.4 1.3 EV/EBITDA (x) 9.1 9.9 9.9 8.6 7.7 EV/Revenue (x) 0.9 0.8 0.8 0.9 0.8 Dividend Yield (%) 0.9 1.0 1.0 1.1 1.3 CFO/EV (%) 5.8 11.2 5.2 5.2 8.6 FCFF/EV (%) 13.2 5.2 (4.4) (6.3) (2.2) FCFE/M Cap (%) 9.0 2.4 4.4 0.1 4.6 Page 4
RECOMMENDATION HISTORY Reliance Inds 1,200 1,100 1,000 900 800 700 TP Date CMP Reco Target 15-Oct-13 868 NEU 980 27-Nov-13 842 BUY 985 20-Jan-14 885 BUY 1,025 21-Apr-14 959 BUY 1,050 11-Jul-14 998 BUY 1,100 21-Jul-14 977 BUY 1,100 1-Oct-14 945 BUY 1,100 600 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document 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. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFC Securities Ltd or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HDFC Securities Ltd. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HDFC Securities and its affiliated company(ies), 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 company(ies) mentioned herein 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 company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HDFC Securities Ltd, its directors, analysts or employees 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 shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HDFC Securities Ltd and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organisations described in this report. HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com Page 5