October 14, 2014 Neutral Reliance Industries Result Update Industry : Oil & Gas Strong show by petchem boosts RIL’s operational performance, KG D6 continues to disappoint RIL’s Q2FY15 operating profit (standalone) was of Rs82.4bn was ahead of our estimate while net profit of Rs57.4bn was in line with our estimate of Rs53.4bn due to higher interest cost and depreciation charge. GRM for the quarter at $8.3/bbl was marginally higher than our estimate while RIL’s premium over Singapore complex GRM increased from $2.9 to $3.5/bbl due to higher crude differentials. Petchem EBIT for the quarter increased by 27.5% sequentially to Rs24bn (yoy -4%) driven by strong rebound in polymers, fibre intermediates and aromatics margins. Petchem EBIT for the quarter was 13% higher than our estimate. Gas production from KG-D6 decreased sequentially to 12.5mmscmd (yoy/qoq -1.8/-0.6mmscmd). Other income increased by 4.6% yoy to Rs21.4bn (29% of PBT). We maintain our NEUTRAL rating on the stock with a revised target price of Rs950. At the CMP, the stock is trading at 11.4x and 7.9x FY16e earnings and EV/EBITDA respectively. Net revenues for the quarter decreased by 7% yoy RIL’s Q2FY15 net revenues stood at Rs965bn (yoy -7%, qoq +0.1%). Refining revenues during the quarter decreased by 5.8% yoy to Rs917bn (qoq +0.9%) driven by strong rupee which appreciated by 2.1% yoy while crude throughput declined by 2.3% yoy. Refining capacity utilization stood at 112%. Petchem revenues for the quarter increased by 5.1% qoq to Rs249bn driven by strong performance of polymer segment. The Oil and Gas segment revenue witnessed a decline of 5.7% yoy to Rs13.8bn due to fall in crude oil price and falling production of both oil and gas. Gas production from KG-D6 declined to 12.5mmscmd (yoy/qoq -1.8/-0.6mmscmd). Strong show by petchem during the quarter RIL’s Q2FY15 operating profit witnessed a sequential increase of 9.4% to Rs82.4bn driven by 27.5% qoq increase in petchem EBIT while refining EBIT of Rs37.9bn was constant on a sequential basis (yoy +19.3%). During the quarter, Singapore complex GRM decreased by 17.2% qoq to $4.8/bbl on account of weakness seen in gasoline and gasoil cracks. RIL’s GRM decreased by $0.4/bbl to $8.3/bbl which was marginally higher than our estimate of $8.3/bbl. Consequently, RIL’s premium over Singapore GRM increased to $3.5/bbl. Petchem EBIT for the quarter increased by 27.5% sequentially to Rs24bn (yoy -4%) driven by strong rebound in polymers, fibre intermediates and aromatics margins. Petchem EBIT for the quarter was 13% higher than our estimate. Oil and Gas EBIT for the quarter decreased by 31.8% qoq to Rs3.3bn due to lower production and fall in crude oil price. Revise our target price to Rs950 We expect the refining business to face headwinds going forward on account of higher 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 12.5mmscmd. 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 Rs950. At the CMP, the stock is trading at 11.4x and 7.9x FY16e earnings and EV/EBITDA respectively. Chirag Dhaifule [email protected] +91 22 6635 1220 Stock Data Current Market Price (Rs) 963 Target Price (Rs) 950 Potential upside (%) (1) Reuters RELI.BO Bloomberg RIL IN What’s Changed 12 month PriceTarget (Rs) From Rs 994 to Rs 950 FY2015 EPS (Rs) From Rs 79.6 to Rs 73 FY2016 EPS (Rs) From Rs 90.4 to Rs 84.4 Key Data Market Cap (Rs bn) 3,102 52-Week Range (Rs) 1,143 / 794 Avg Dly Trading Value last 6 mts (Rs.mn) 3,815 Promoters (%) 45.26 FII Holding (%) 19.46 DII Holding (%) 11.32 Public & Others Holding (%) 23.96 Fiscal YE YE Mar FY13 FY14 Total sales(Rs bn) 3,971 4,345 3,983 4,014 EBITDA margins(%) 8.3 8.0 9.8 11.2 PAT margins(%) 5.3 5.2 5.9 6.8 EPS(Rs) 64.7 69.6 73.0 84.4 P/E(x) 14.9 13.8 13.2 11.4 1.7 1.6 1.4 1.3 EV/EBITDA(x) 10.0 10.8 9.5 7.9 ROE(%) 11.9 11.8 11.3 11.8 ROCE(%) 9.6 9.2 8.7 9.2 Dividend yield( %) 0.9 0.9 0.9 0.9 P/BV(x) FY15e FY16e Relative Price Performance 140 120 100 80 60 Oct-13 Feb-14 Reliance Ind Jun-14 Oct-14 S&P Bse Sensex One Year Indexed (%) Absolute BSE Relative 1 Month (5) (3) 3 Months (4) (7) 12 Months 10 (17) 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. 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Reliance Industries Actual v/s Estimates Y/E, Mar (Rs. m) Q2FY15 Q1FY15 qoq (%) Q2FY14 yoy (%) Revenue 964,860 963,510 0.1% 1,037,580 -7.0% 915,307 5.4% EBITDA 82,350 75,300 9.4% 78,490 4.9% 74,505 10.5% 8.5% 7.8% 72 bps 7.6% 97 bps 8.1% 39 bps 57,420 56,490 1.6% 54,900 4.6% 56,288 2.0% EBITDA (%) PAT LKP Estimates Deviation (%/bps) Result Table Y/E, Mar (Rs. mn) Q2FY14 Q1FY15 Q2FY15 yoy (%) qoq (%) H1FY14 H1FY15 yoy (%) 1,037,580 963,510 964,860 -7.0% 0.1% 1,914,030 1,928,370 0.7% 881,800 788,460 782,750 -11.2% -0.7% 1,611,630 1,571,210 -2.5% Purchase of products 1,160 17,160 17,360 1396.6% 1.2% 5,080 34,520 579.5% Employee Cost 8,080 9,290 9,320 15.3% 0.3% 17,070 18,610 9.0% Net Revenue Raw Material Consumption Other Expenditure Total Operating Costs EBITDA 68,050 73,300 73,080 7.4% -0.3% 131,010 146,380 11.7% 959,090 888,210 882,510 -8.0% -0.6% 1,764,790 1,770,720 0.3% 78,490 75,300 82,350 4.9% 9.4% 149,240 157,650 5.6% EBITDA (%) 7.6% 7.8% 8.5% 97bps 72bps 7.8% 8.2% 38bps Depreciation 22,330 20,240 22,270 -0.3% 10.0% 43,710 42,510 -2.7% Interest 8,050 3,240 7,580 -5.8% 134.0% 16,150 10,820 -33.0% Other Income 20,600 20,460 21,400 3.9% 4.6% 45,950 41,860 -8.9% PBT 68,710 72,280 73,900 7.6% 2.2% 135,330 146,180 8.0% Tax 13,810 15,790 16,480 19.3% 4.4% 26,910 32,270 19.9% Tax Rate (%) 20.1% 21.8% 22.3% 220bps 45bps 19.9% 22.1% 219bps Adj PAT 54,900 56,490 57,420 5% 2% 108,420 113,910 5.1% Rep PAT 54,900 56,490 57,420 4.6% 1.6% 108,420 113,910 5.1% 3,231 3,233 3,234 3,231 3,234 17.0 17.5 17.8 33.6 35.2 5.0% Shares outstanding (mn) Reported EPS (Rs) 4.5% 1.6% Segmental Breakup Y/E, Mar (Rs. mn) Q2FY14 Q1FY15 Q2FY15 yoy (%) qoq (%) H1FY14 H1FY15 yoy (%) Petrochemicals 248,920 237,150 249,320 0.2% 5.1% 468,420 486,470 3.9% Refining 974,560 909,980 917,810 -5.8% 0.9% 1,789,140 1,827,790 2.2% 14,640 15,570 13,800 -5.7% -11.4% 29,180 29,370 0.7% 3,300 1,930 2,210 -33.0% 14.5% 9,460 4,140 -56.2% Petrochemicals 25,040 18,850 24,030 -4.0% 27.5% 43,920 42,880 -2.4% Refining 31,740 37,730 37,880 19.3% 0.4% 61,250 75,610 23.4% 3,560 4,870 3,320 -6.7% -31.8% 7,080 8,190 15.7% 420 520 660 57.1% 26.9% 1,260 1,180 -6.3% 10.1% 7.9% 9.6% -42bps 169bps 9.4% 8.8% -56bps Segment Revenue Oil & Gas Others Segment EBIT Oil & Gas Others EBIT Margins Petrochemicals Refining 3.3% 4.1% 4.1% 87bps -2bps 3.4% 4.1% 71bps Oil & Gas 24.3% 31.3% 24.1% -26bps -722bps 24.3% 27.9% 362bps Others 12.7% 26.9% 29.9% 1714bps 292bps 13.3% 28.5% 1518bps LKP Research 2 Reliance Industries Refining GRM decreases to $8.3/bbl Refining revenues during the quarter decreased by 5.8% yoy to Rs917bn (qoq +0.9%) driven by strong rupee which appreciated by 2.1% yoy while crude throughput declined by 2.3% yoy. Refining capacity utilization stood at 112%. Singapore complex GRM decreased by 17.2% qoq to $4.8/bbl on account of weakness seen in gasoline and gasoil cracks. RIL’s GRM decreased by $0.4/bbl to $8.3/bbl which was marginally higher than our estimate of $8.3/bbl. Consequently, RIL’s premium over Singapore GRM increased to $3.5/bbl. Higher crude throughput negated the effect of fall in RIL’s GRM. RIL’s refining EBIT of Rs37.9bn was constant on a sequential basis (yoy +19.3%). RIL’s GRM at $8.3/bbl decreased by $0.4/bbl on sequential basis 12.0 ($/bbl) 10.0 8.0 6.0 4.0 2.0 Q2FY13 Q3FY13 Q4FY13 Q1FY14 RIL GRM Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Singapore Complex GRM Source: LKP Research RIL’s refinery utilization and crude processed for Q2FY15 18 118% 115% 17 112% 109% 16 106% 103% 15 100% Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Crude Processed (mmt) RIL's Refinery Utilization Rate Source: LKP Research LKP Research 3 Reliance Industries Strong Petchem performance during the quarter RIL’s petrochemicals revenue for the quarter increased by 5.1% qoq to Rs249bn driven by strong performance of polymer segment. Petchem EBIT for the quarter increased by 27.5% sequentially to Rs24bn (yoy 4%) driven by strong rebound in polymers, fibre intermediates and aromatics margins. Petchem EBIT for the quarter was 13% higher than our estimate. Petchem’s EBIT margin for the quarter increased by 169bps qoq to 9.6% (yoy 42bps). Lower naphtha prices due to decline in crude oil prices also helped petchem margin expansion. Petchem margin increased by 169bps sequentially to 9.6% 30 (Rs bn) 14% 25 12% 20 15 10% 10 8% 5 0 6% Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Petrochemicals EBIT (Rs bn) Petrochemicals EBIT (%) Source: LKP Research Petchem volumes trend 5.8 (mmt) 5.6 5.4 5.2 5.0 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Source: LKP Research LKP Research 4 Reliance Industries Upstream business affected by lower gas production from KG – D6 and lower oil price Gas production from KG-D6 averaged 12.5mmscmd during Q2FY15 as against 13.1mmscmd in Q1FY15. Total gas production (incl PMT) averaged 19mmscmd during the quarter. Crude oil production from KG-D6 decreased by 2.2% yoy to 5,435bpd (qoq 6.7%) while oil production from PM fields was constant at 22kbpd. Tapti field fields continued to witness natural decline during the quarter. Oil and Gas EBIT for the quarter decreased by 31.8% qoq to Rs3.3bn due to lower production and fall in crude oil price. We have modeled gas production at 15/20mmscmd and gas price of $4.2/6.5mmbtu for FY15e/16e. KG-D6 gas production at 12.5mmscmd Prodn at PM during the quarter 30 10,000 25 6.0 24,000 5.5 8,000 22,000 20 5.0 15 6,000 20,000 4.5 10 5 4,000 Q2FY13 Q4FY13 Q2FY14 KG - D6 Gas Prodn (mmscmd) Q4FY14 Q2FY15 4.0 18,000 Q2FY13 KG - D6 Oil Prodn (bpd) Q4FY13 Q2FY14 Q4FY14 PM Gas Prodn (mmscmd) PM Oil Prodn (bpd) Source: LKP Research Source: LKP Research Tapti gas prodn continues to fall due to natural decline E&P segment EBIT at Rs3.3bn in Q4FY14 4.0 1,600 3.0 1,200 10 8.7 8 5.9 6 2.0 5.4 4.9 4.6 800 3.5 4 1.0 Q2FY15 3.6 3.8 Q2FY14 Q4FY14 3.3 400 2 0.0 0 Q2FY13 Q4FY13 Q2FY14 Tapti Gas Prodn (mmscmd) Source: LKP Research LKP Research Q4FY14 Q2FY15 0 Q2FY13 Q4FY13 Tapti Condensate Prodn (bpd) Q2FY15 Oil & Gas EBIT (Rs bn) Source: LKP Research 5 Reliance Industries Valuation & View RIL is investing heavily in its core businesses to increase its capacities over the next few years. In its refining division, RIL is setting up a petcoke gasification plant at an estimated cost of $4bn while in its petchem division, RIL is spending $8bn to a) set up a refinery off-gas cracker and b) expand capacity. We estimate RIL’s operating profit to grow at 12.4% cagr over FY14-17e period as against a muted growth of 3% over FY10-14, while we expect RIL’s operating profit margin to increase by 521bps to 13.2%. We expect the refining business to face headwinds going forward on account of higher 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 12.5mmscmd. 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. We maintain our NEUTRAL rating on the stock with a revised target price of Rs950. At the CMP, the stock is trading at 11.4x and 7.9x FY16e earnings and EV/EBITDA respectively. SOTP valuation - FY16e basis Business Segments Method Multiple Value (Rs mn) EV (Rs mn) (Rs/sh) Refining EV/EBITDA 6.5x 189,042 1,228,773 418 Petrochemicals EV/EBITDA 6.5x 148,058 962,375 327 606,945 206 177,369 60 112,510 38 E&P business Shale Gas Assets NPV & EV/boe EV/boe Retail Book Value 1x SEZ Book Value 1x 49,910 49,910 17 Infotel Book Value 1x 230,446 230,446 78 3,368,329 1,146 576,556 196 2,791,773 950 Total EV Net Debt / (Cash) Equity Value 112,510 CMP 963 Upside / (Downside) -1% LKP Research 6 Reliance Industries Financials Income statement Y/E, Mar (Rs. m) Net Sales yoy (%) Raw Materials Exp Purch - traded goods Mfg Exp Gross Profit Employee Cost Other Expenditure Total Expenditure EBITDA EBITDA margin yoy (%) Depreciation Core EBIT Core EBIT margin Other Income EBIT EBIT margin Interest PBT Tax Tax rate (%) Adj PAT Minority Interest Adj PAT after MI EOIs Reported PAT Balance sheet FY13 FY14 FY15e FY16e 39,70,620 43,44,600 39,82,674 40,14,421 10.8% 9.4% -8.3% 0.8% 32,18,250 34,59,310 30,88,827 30,62,746 1,04,250 1,70,910 1,70,321 1,70,280 1,43,011 1,67,102 1,50,409 1,49,233 5,05,109 5,47,278 5,73,117 6,32,162 51,790 55,720 51,933 51,667 1,22,869 1,43,568 1,31,473 1,30,622 36,40,170 39,96,610 35,92,964 35,64,548 3,30,450 3,47,990 3,89,710 4,49,873 8.3% 8.0% 9.8% 11.2% -4.2% 5.3% 12.0% 15.4% 1,12,320 1,12,010 1,33,962 1,47,866 2,18,130 2,35,980 2,55,748 3,02,007 5.5% 5.4% 6.4% 7.5% 78,000 89,110 89,610 90,110 2,96,130 3,25,090 3,45,358 3,92,117 7.5% 7.5% 8.7% 9.8% 34,630 38,360 44,334 44,334 2,61,500 2,86,730 3,01,024 3,47,783 53,310 62,150 65,148 74,954 20.4% 21.7% 21.6% 21.6% 2,08,190 2,24,580 2,35,876 2,72,829 -600 -350 0 0 2,08,790 2,24,930 2,35,876 2,72,829 0 0 0 0 2,08,790 2,24,930 2,35,876 2,72,829 Y/E, Mar (Rs. m) Equity share capital Reserves & surplus Networth Minority Interest Secured Loans Unsecured Loans Loan Funds Total Liabilities Gross Block Less: Depreciation Net block Capital WIP Investment Current Assets Inventories Sundry debtors Cash & bank bal Other assets Loans & advances Curr. Liab & Prov Current liabilities Provisions Net current assets Net Def tax liability Misc expenditure Total Assets FY13 FY14 FY15e FY16e 29,360 17,91,190 18,20,550 9,490 65,876 6,43,724 7,09,600 25,39,640 26,39,690 10,58,930 15,80,760 2,53,630 4,28,480 13,60,700 5,46,010 97,500 5,04,560 17,830 1,94,800 9,68,050 9,17,170 50,880 3,92,650 -1,15,880 0 25,39,640 29,400 19,57,470 19,86,870 9,590 94,531 9,23,729 10,18,260 30,14,720 32,46,420 11,70,940 20,75,480 2,53,630 6,13,250 13,46,070 5,59,970 94,110 3,79,840 32,540 2,79,610 11,54,460 11,07,100 47,360 1,91,610 -1,19,250 0 30,14,720 29,400 21,60,666 21,90,066 9,590 94,531 9,23,729 10,18,260 32,17,916 35,12,220 13,04,902 22,07,318 2,61,463 6,13,250 13,20,936 5,20,140 84,217 4,41,704 32,108 2,42,767 10,65,800 10,22,306 43,494 2,55,136 -1,19,250 0 32,17,916 29,400 24,00,816 24,30,216 9,590 94,531 9,23,729 10,18,260 34,58,066 37,78,020 14,52,768 23,25,252 2,61,463 6,13,250 14,50,928 5,23,634 85,084 5,64,065 32,146 2,45,999 10,73,577 10,29,744 43,833 3,77,351 -1,19,250 0 34,58,066 FY13 FY14 FY15e FY16e 12.7% 8.3% 5.5% 5.3% 20.4% 12.6% 8.0% 5.4% 5.2% 21.7% 14.4% 9.8% 6.4% 5.9% 21.6% 15.7% 11.2% 7.5% 6.8% 21.6% 64.7 99.4 563.8 8.2 69.6 104.3 614.7 8.7 73.0 114.4 677.6 8.7 84.4 130.2 751.9 8.7 14.9 9.7 1.7 10.0 0.8 9.4 0.8 13.8 9.2 1.6 10.8 0.9 8.9 0.7 13.2 8.4 1.4 9.5 0.9 8.0 0.8 11.4 7.4 1.3 7.9 0.9 6.9 0.8 9.6% 13.6% 11.9% 0.39 0.9% 9.2% 12.2% 11.8% 0.51 0.9% 8.7% 11.1% 11.3% 0.46 0.9% 9.2% 12.0% 11.8% 0.42 0.9% 10.8% -4.2% -1.3% 5.9% 9.4% 5.3% 8.2% 7.7% -8.3% 12.0% 8.4% 4.9% 0.8% 15.4% 18.1% 15.7% Ratios Cash Flow Y/E, Mar (Rs. m) Profit after Tax Add : Depreciation Add : Non cash Add : Misc exp w/off changes in Inventory changes in debtors changes in other CA changes in L & A changes in CL & prov Net changes in WC CFO Capital expenditure Investments CFI Increase in debt Issue of Shares Share Premium dividend paid CFF Net cash generated Opening balance Closing balance Free Cash flow LKP Research Y/E, Mar FY13 2,08,790 1,12,320 -49,633 0 -79,090 71,890 17,780 -29,850 1,67,770 1,48,500 4,19,977 -3,04,937 -42,520 -3,47,457 56,080 -430 0 -30,920 24,730 97,250 4,07,310 5,04,560 1,15,040 FY14 FY15e FY16e 2,24,930 2,35,876 2,72,829 1,12,010 1,33,962 1,47,866 -22,500 0 0 0 0 0 -13,960 39,830 -3,494 3,390 9,893 -868 -14,710 432 -38 -84,810 36,843 -3,232 1,86,410 -88,660 7,777 76,320 -1,662 146 3,90,760 3,68,177 4,20,841 -6,06,730 -2,73,633 -2,65,800 -1,84,770 0 0 -7,91,500 -2,73,633 -2,65,800 3,08,660 0 0 40 0 0 0 0 0 -32,680 -32,680 -32,680 2,76,020 -32,680 -32,680 -1,24,720 61,864 1,22,361 5,04,560 3,79,840 4,41,704 3,79,840 4,41,704 5,64,065 -2,15,970 94,544 1,55,041 Profitability Gross profit margin EBITDA margin Core EBIT margin APAT margin Tax Rate Per Share (Rs) EPS CEPS Book Value Per Share Dividend Per Share Valuations Ratios (x) PER P/CEPS P/BV EV/EBITDA EV/Sales M-Cap/EBITDA M-Cap/sales Financial ratios ROCE ROIC ROE Debt/Equity Dividend yield (%) Growth Net Sales EBITDA Core EBIT APAT after Min int 7 Reliance Industries Team LKP Pratik Doshi Director 98210 47676 [email protected] S. Ranganathan Head of Research 98212 22510 6635 1270 [email protected] Ashwin Patil Research Analyst 98195 78395 6635 1271 [email protected] Chirag Dhaifule Research Analyst 98679 80172 6635 1220 [email protected] Hardik Mehta Sales 98190 66569 6635 1246 [email protected] Varsha Jhaveri Sales 93241 47566 6635 1296 [email protected] Hitesh Doshi Sales 93222 45130 6635 1281 [email protected] Bharat Shah Dealing 98337 97256 6635 1210 [email protected] Kaushik Doshi Dealing 93205 23595 6635 1207 [email protected] 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
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