Please refer to important disclosures at the end of this report 1 Y/E March (` cr) 3QFY11 2QFY11 % chg (qoq) 3QFY10 % chg (yoy) Net Operating Income 59,789 57,479 4.0 56,856 5.2 EBITDA 9,545 9,396 1.6 7,844 21.7 EBITDA Margin (%) 16.0 16.3 (0.4) 13.8 2.2 Adj. PAT 5,136 4,923 4.3 4,008 28.1 Source: Company, Angel Research RIL reported 28.1% yoy growth in bottom-line on account of higher refining and petchem margins. On a sequential basis, PAT grew by a mere 4.3% on account of the dip in natural gas output from KG-D6 and lower refining volumes. However, the numbers were below our expectations on the top-line and bottom-line fronts on account of the lower-than-expected refining margins and we had not taken into consideration the lower refining volumes on account of the refinery shutdown. We maintain a Buy on the stock. Earnings post sequential as well as yoy growth: Top-line increased by 5.2% yoy to `59,789cr (`56,856cr) primarily on the back of the 9.4% yoy growth in refining revenues to `52,5242cr (`48,00cr) and 8.2% yoy increase in petchem revenues to `15,962cr (`14,756cr). Despite planned shut down of one train of the crude distillation unit for 22 days during the quarter, the refining segment reported growth due to higher product prices. Crude oil processed during the quarter was lower by 3% yoy to 16.1mn tonnes (16.6mn tonnes). KG-D6 gas production fell qoq with average production at 54.5mmscmd (58.5mmscmd). Operating profit grew 21.7% yoy to `9,545cr (`7,844cr), which was 6.9% lower than our estimate on account of the lower-than-expected refining throughput and refining margins. Outlook and Valuation: Upside in the upstream business has increased on the back of the newer ventures and initiatives by RIL. Timely ramp up in the producing fields is expected to improve investor sentiment and aid them factor in other prospective basins also. Nonetheless, the macro headwinds would persist owing to which we expect the refining and petchem margins to stabilise around current levels. We maintain a Buy on RIL, with a SOTP-based Target Price of `1,160. Key Financials (Consolidated) Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E Net sales 151,224 203,740 243,815 283,665 % chg 10.3 34.7 19.7 16.3 Net Profit 14,969 15,897 19,835 22,305 % chg 1.2 6.2 24.8 12.5 EPS (`) 50.3 53.4 66.6 74.9 EBITDA Margin (%) 15.5 15.2 15.7 15.0 P/E (x) 19.6 18.5 14.8 13.2 RoE (%) 14.2 18.6 13.2 13.2 RoCE (%) 10.0 9.4 10.8 11.1 P/BV (x) 2.4 2.1 1.8 1.6 EV/ Sales (x) 2.5 1.8 1.5 1.3 EV/ EBITDA (x) 16.1 12.1 9.6 8.4 Source: Company, Angel Research; Note: No of shares is 297.8cr BUY CMP `987 Target Price `1,160 Investment Period 12 Months Stock Info Sector Bloomberg Code Shareholding Pattern (%) Promoters 44.7 MF / Banks / Indian Fls 15.2 FII / NRIs / OCBs 22.2 Indian Public / Others 17.9 Abs. (%) 3m 1yr 3yr Sensex (6.2) 11.5 13.6 RIL (8.6) (6.4) (22.5) 5,697 Reuters Code RELI.BO RIL@IN Avg. Daily Volume 850852 Face Value (`) 10 BSE Sensex 19,008 Oil & Gas Market Cap (` cr) 322,825 Beta 1.1 52 Week High / Low 1187/841 Nifty Vinay Nair Tel: 022 - 39357800 Ext: 6816 [email protected]Amit Vora Tel: 022 - 39357800 Ext: 6839 [email protected]Reliance Industries Performance Highlights 3QFY2011 Result Update | Oil & Gas January 21 2010
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Please refer to important disclosures at the end of this report 1
Y/E March (` cr) 3QFY11 2QFY11 % chg (qoq)
3QFY10 % chg (yoy)
Net Operating Income 59,789 57,479 4.0 56,856 5.2
EBITDA 9,545 9,396 1.6 7,844 21.7
EBITDA Margin (%) 16.0 16.3 (0.4) 13.8 2.2
Adj. PAT 5,136 4,923 4.3 4,008 28.1
Source: Company, Angel Research
RIL reported 28.1% yoy growth in bottom-line on account of higher refining and petchem margins. On a sequential basis, PAT grew by a mere 4.3% on account of the dip in natural gas output from KG-D6 and lower refining volumes. However, the numbers were below our expectations on the top-line and bottom-line fronts on account of the lower-than-expected refining margins and we had not taken into consideration the lower refining volumes on account of the refinery shutdown. We maintain a Buy on the stock.
Earnings post sequential as well as yoy growth: Top-line increased by 5.2% yoy to `59,789cr (`56,856cr) primarily on the back of the 9.4% yoy growth in refining revenues to `52,5242cr (`48,00cr) and 8.2% yoy increase in petchem revenues to `15,962cr (`14,756cr). Despite planned shut down of one train of the crude distillation unit for 22 days during the quarter, the refining segment reported growth due to higher product prices. Crude oil processed during the quarter was lower by 3% yoy to 16.1mn tonnes (16.6mn tonnes). KG-D6 gas production fell qoq with average production at 54.5mmscmd (58.5mmscmd). Operating profit grew 21.7% yoy to `9,545cr (`7,844cr), which was 6.9% lower than our estimate on account of the lower-than-expected refining throughput and refining margins.
Outlook and Valuation: Upside in the upstream business has increased on the back of the newer ventures and initiatives by RIL. Timely ramp up in the producing fields is expected to improve investor sentiment and aid them factor in other prospective basins also. Nonetheless, the macro headwinds would persist owing to which we expect the refining and petchem margins to stabilise around current levels. We maintain a Buy on RIL, with a SOTP-based Target Price of `1,160.
Key Financials (Consolidated)
Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E
Net sales 151,224 203,740 243,815 283,665
% chg 10.3 34.7 19.7 16.3
Net Profit 14,969 15,897 19,835 22,305
% chg 1.2 6.2 24.8 12.5
EPS (`) 50.3 53.4 66.6 74.9
EBITDA Margin (%) 15.5 15.2 15.7 15.0
P/E (x) 19.6 18.5 14.8 13.2
RoE (%) 14.2 18.6 13.2 13.2
RoCE (%) 10.0 9.4 10.8 11.1
P/BV (x) 2.4 2.1 1.8 1.6
EV/ Sales (x) 2.5 1.8 1.5 1.3
EV/ EBITDA (x) 16.1 12.1 9.6 8.4 Source: Company, Angel Research; Note: No of shares is 297.8cr
Total EBIT 6,378 6,103 4.5 4,922 29.6 14,126 20,048 (29.5)
EBIT Margin (%)
Petrochemicals 15.2 14.6
13.9
14.1 15.5
Refining & Marketing 4.6 4.4
2.9
2.6 3.7
Oil & Gas 36.0 39.6
41.8
28.2 42.8
Others 5.0 5.2
11.6
7.0 10.8
Total 8.8 8.8
7.4
6.7 8.7
Source: Company, Angel Research
Reliance Industries | 3QFY2011 Result Update
January 21 2010 3
Exhibit 3: 3QFY2011 Actual v/s Estimates
(` cr) Estimates Actual Variation (%)
Net Operating Income 68,347 59,789 (12.5) EBITDA 10,252 9,545 (6.9) EBITDA Margin %) 15.0 16.0 (1.0) PBT 6,833 6,378 (6.7) Adj. PAT 5,535 5,136 (7.2)
Source: Company, Angel Research
Top-line below estimates on lower-than-expected Refining volumes: RIL's top-line was below our estimates on account of lower-than-expected refining volumes as we had not considered the refinery shut down for 22 days during the quarter. Top-line increased by 5.2% yoy to `59,789cr (`56,856cr) primarily on the back of the 9.4% yoy growth in refining revenues to `52,5242cr (`48,000cr) and 8.2% yoy increase in petchem revenues to `15,962cr (`14,756cr). Despite planned shut down of one train of the crude distillation unit for 22 days during the quarter, the refining segment reported growth due to higher product prices. The petrochemical segment registered 8.2% yoy increase in top-line driven by higher polymer and polyester prices. Crude oil processed during the quarter was lower by 3% yoy to 16.1mn tonnes (16.6mn tonnes). KG-D6 gas production fell qoq with average production at 54.5mmscmd (58.5mmscmd).
Exhibit 4: Sales growth trend
Source: Company, Angel Research
Higher refining and petchem margins leads to improvement in OPM yoy: During the quarter, RIL reported GRMs of US $9/bbl (US $5.9/bbl), marginally lower than our expectation of US $9.3/bbl. Benchmark complex Singapore margins, during the quarter, stood at around US $5.5/bbl. Thus, RIL managed to earn a spread of US $3.5/bbl. On the petchem side, it was the best-ever quarter for the company. Petrochemical EBIT margins improved by 66bp qoq to 15.2% (14.6% in 2QFY2011) during 3QFY2011 due to higher polymer and polyester margins owing to tighter cotton market. The oil and gas segment's EBIT margin declined by 584bp yoy and 365bp qoq to 36% (39.6% in 2QFY2011) due to higher proportion of KG-D6 production compared to production from the PMT field. As a result, overall OPM expanded by 217bp yoy 16% (13.8%). Operating profit grew by 21.7% yoy to `9,545cr (`7,844cr). However, margins stood lower
on qoq basis by 38bp due to lower capacity utilisation of the refinery and dip in production of natural gas at the KG basin.
Exhibit 5: EBIT break-up
Source: Company, Angel Research
Exhibit 6: Operating performance trend
Source: Company, Angel Research
Depreciation, other income increase: Depreciation during the quarter increased 20.2% yoy primarily on account of higher depletion charge in the oil & gas segment and increased depreciation in the refining business. Interest expenditure stood flat both on qoq and yoy basis. Other income increased by 45.9% yoy to `741cr (`508cr) and 10.3% qoq on account of higher cash balance.
PAT grew 28.1%: PAT grew 28.1% yoy to `5,136cr (`4,008cr), which was below our expectation of `5,535cr. The deviation was mainly on account of the lower-than-expected refining volumes and margins.
Exhibit 7: PAT growth trend
Source: Company, Angel Research
0%
20%
40%
60%
80%
100%
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
11
3QFY
11
Petrochemicals Refining Oil and gas Others
13.8
15.9
16.0 16.3
16.0
12.0
13.0
14.0
15.0
16.0
17.0
-
2,000
4,000
6,000
8,000
10,000
12,000
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11
(%)
(`cr
)
Operating Profit Operating Margins (RHS)
15.8 19.1
32.3 27.8
28.1
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
-
1,000
2,000
3,000
4,000
5,000
6,000
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11
(%)
(`cr
)
PAT PAT growth (RHS)
Reliance Industries | 3QFY2011 Result Update
January 21 2010 5
Segment-wise performance
Refining and marketing (R&M): During the quarter, crude processing stood at 16.1mn tonnes (16.6mn tonnes), down 3% yoy, with the refinery reporting capacity utilisation of 104%. Crude processing was lower on account of the planned shut down of one train of the crude distillation unit for 22 days during the quarter. Despite the lower crude throughput, higher petroleum product prices led to 9.4% yoy increase in R&M revenues to `52,524cr (`48,000cr). On the margins front, RIL reported GRMs of US $9/bbl (US $5.9/bbl) as against our expectation of US $9.3/bbl. Thus, refining margins were marginally lower than our expectations. Singapore margins during the quarter averaged at US $5.5/bbl. Thus, RIL managed to earn a spread of US $3.5/bbl over the same. Improvement in the refining margins could be traced to improved product spread of middle distillates on account of cold weather in the US and higher Chinese demand for diesel. Moreover, the increase in heavy-light crude oil spread by US $1/bbl (primarily due to weak fuel oil cracks and higher demand for lighter products resulting in higher demand for lighter crude) also increased refining margins during the quarter. Refined product exports stood at 28.4MMT (US $20.1bn) in 9MFY2011 as against 23.6MMT (US $14.3bn) in 9MFY2010 on incremental export volumes from the SEZ refinery.
Exhibit 8: RIL v/s Benchmark Singapore GRMs
Source: Company, Angel Research
-2.0 4.0 6.0 8.0
10.0 12.0 14.0 16.0 18.0
1Q
FY0
8
2Q
FY0
8
3Q
FY0
8
4Q
FY0
8
1Q
FY0
9
2Q
FY0
9
3Q
FY0
9
4Q
FY0
9
1Q
FY1
0
2Q
FY1
0
3Q
FY1
0
4Q
FY1
0
1Q
FY1
1
2Q
FY1
1
3Q
FY1
1
(US
$/b
bl)
RIL GRMs Singapore GRMs
Reliance Industries | 3QFY2011 Result Update
January 21 2010 6
Exhibit 9: Capacity utilisation trend
Source: Company, Angel Research
Petrochemicals: The petrochemical segment revenues grew 8.2% yoy to `15,962cr (`14,756cr) due to higher polymer and polyester prices yoy. Blended product deltas were higher on yoy as well as qoq basis on account of strength in PP and polyester margins. Polymer margins were higher on account of higher Asian demand, and the polyester cracks were higher due to tighter cotton market. EBIT margins of the segment increased by 66bp qoq to 15.2% (14.6%). PP delta, which stood at US $94/MT during 2QFY2011, surged to US $239/MT during the quarter on account of strong demand growth and stable propylene prices lending a boost to petchem margins. However, margins were flat in the HDPE-naphtha segment at US $485/MT v/s US $485/MT during 2QFY2011 and PVC-EDC segment were also stable, with a margin of US $395/MT as against US $410/MT in 2QFY2011, as increase in EDC price tracked that of PDC.
Oil & Gas: Oil and Gas EBIT registered qoq de-growth of 11.8% to `1,504cr (`1,706cr) on account of slower ramp up in KG basin and oil production. The gas production at KG basin was lower due to reservoir pressure constraints in the fields. RIL’s KG-D6 gas production during the quarter averaged at 54.5mmscmd as against 58.5mmscmd in 2QFY2011. Crude oil production from the KG basin decreased to 19,400bpd from ~22,229bpd in 2QFY2011. After the shut down in the previous quarter, PMT resumed production during the quarter. Thus, owing to lower production from KG-D6, EBIT margins of the segment declined by 365bp qoq to 36% (39.6%).
7.0
9.0
11.0
13.0
15.0
17.0
20.0
40.0
60.0
80.0
100.0
120.0
1Q
FY0
8
2Q
FY0
8
3Q
FY0
8
4Q
FY0
8
1Q
FY0
9
2Q
FY0
9
3Q
FY0
9
4Q
FY0
9
1Q
FY1
0
2Q
FY1
0
3Q
FY1
0
4Q
FY1
0
1Q
FY1
1
2Q
FY1
1
3Q
FY1
1
(mn
tonn
es)
(%)
Capacity Utilisation Crude Processing (RHS)
Reliance Industries | 3QFY2011 Result Update
January 21 2010 7
Investment Arguments
Ramp up in KG-D6 could allay many concerns over valuation: RIL is still producing natural gas below its potential 80mmscmd due to constraints over reservoir pressure. However, we are confident about RIL ramping up its production in the coming quarters. The upstream segment still has significant upside in store, considering huge untapped resources. Timely ramp up in the producing fields would improve investor sentiment and aid them factor in other prospective basins also. We expect KG-D6 to ramp up to its full potential during FY2013.
Core business margins to stabilise: We expect refining and petchem margins to stabilise at current levels. The recent spurt was consequent to higher demand from the emerging economies and stimulus led recovery in the OECD economies. Going forward, we expect margins to stabilise due to tightening of emerging economies and high spare capacity to meet incremental demand.
Newer ventures could be a long-term catalyst: RIL has been actively eyeing inorganic routes for diversifying its asset portfolio by entering into newer ventures. Significant cash pile and treasury stocks could see RIL venturing into on more
inorganic routes for growth and prove to be an upside trigger for the stock. Out of all the company’s recent initiatives, we find the shale gas venture the most promising one on account of the in-place reserves of ~12TCF.
Reliance Industries | 3QFY2011 Result Update
January 21 2010 8
Outlook and Valuation
We believe that the macro headwinds will continue to surround refining and petchem business and any incremental demand will be absorbed by surplus capacities globally. Thus, we expect RIL’s refining and petchem margins to stabilise around current levels.
A significant cash pile and treasury stocks could see RIL venturing into more inorganic avenues, which could provide upside triggers for the stock. We believe that RIL has already made significant investments in new businesses like shale gas and telecom, and is likely to crystallise its plans to foray into other segments. Thus, this could address the cash redeployment concerns to a large extent. Moreover, the proposed plans to increase capacity of the petrochemical segment and addition of the coker in the refining segment are likely to further consolidate the company’s position in its existing businesses.
Timely ramp up in the producing fields would improve investor confidence and aid them factor other prospective basins also. The high potential exploratory fields would provide further visibility once the DGH approvals are in place. Valuations would receive further boost on any improvement in the distillate and polymer cracks consequent to recovery in global demand.
We maintain a Buy on RIL, with a SOTP-based Target Price of `1, 160, translating into an upside of 17.6% from current levels.
Payables (days) 60.5 66.6 84.5 78.8 70.0 66.7 Working capital cycle (ex-cash) (days)
26.1 41.4 20.9 8.7 17.2 13.6
Solvency ratios (x) Net debt to equity 0.4 0.5 0.4 0.4 0.3 0.2
Net debt to EBITDA 1.6 2.0 2.3 1.6 1.1 0.8 Interest Coverage (EBIT/Interest)
12.4 16.7 9.8 9.7 10.7 13.8
Reliance Industries | 3QFY2011 Result Update
January 21 2010 15
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