BoA ML: Reliance Industries: Raise earnings and PO on higher petrochemical margins

Reliance Industries: Raise earnings and PO on higher petrochemical margins
􀂄 Raise FY13E earnings by 5% and PO by 3% to Rs1,206
We have raised FY13E earnings and PO of Reliance Industries (RIL) by 5% and
3% respectively. Its PO is up to Rs1,206/share now. The upgrade in earnings and
PO is driven by upgrade in petrochemical margins. RIL should also gain from a
volume increase as it is implementing projects worth US$7bn to expand its
petrochemical capacity. Petrochemical was 43% of RIL’s FY10 EBIT and we now
expect it to be 28-35% of its FY11-FY13E EBIT. We retain Buy on RIL.
FY12 unchanged as petrochemical EBIT up but refining cut
The upgrade in petrochemical margins for FY12E has meant a 27% upgrade in
RIL’s petrochemical EBIT. This should have meant an upgrade in RIL’s FY12E
EPS by 6%. However we have cut RIL’s FY12E refining margin by 8% and EBIT
by 14% and, thus, FY12E EPS is unchanged. We still incorporate a 15% YoY rise
in RIL’s FY12E refining margin (to US$8.9/bbl) vis-à-vis 24% YoY rise assumed
earlier. The upgrade in petrochemical margins boosts RIL’s FY13E petrochemical
EBIT by 30% and its earnings by 5%. RIL should also gain in FY13E from
polyester and PTA (phase I) capacity increase of 36-56%. It is expected to be
commissioned18-24 months from June 2010 (i.e. latest by June 2012).
Petrochemical cycle to get increasingly better from 2011
We expect modest improvement in petrochemical cycle in 2011-12 and a
potentially “sold-out” condition in 2013. We expect the ethylene capacity utilization
rate to be 90% vs. 82% in 2010 assuming no major recession in the period. 2010
will likely end with extended mid-cycle margins, despite a plethora of new
capacities worldwide YTD. This is due to strong demand growth in China and a
slew of unplanned plant outages in Asia.