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Reliance Industries Ltd. Strong refining margins bode well for 3Q earnings outlook
Good outlook for 3Q FY11E driven by refining; Retain Buy
Reuters’ Singapore complex refining margin at US$5/bbl to date in 3Q FY11 is at
the highest level in seven quarters. 3Q theoretical refining margin of Reliance
Industries (RIL) is estimated by us at US$9.8-10.4/bbl, which is also the highest
level in seven quarters. RIL’s 3Q earnings outlook is good driven by refining even
if 3Q margin is lower than theoretical margin but over US$9/bbl. A good 3Q would
make our FY11E EPS achievable. However refining strength would have to
continue in 4Q for consensus FY11E EPS to be achieved. To achieve our FY12
EPS refining strength needs to sustain even in FY12. Retain Buy.
RIL’s 3Q FY11 theoretical refining margin US$9.8-10.4/bbl
Reuters’ Singapore GRM to date in 3Q FY11 at US$5/bbl is 160% YoY and 18%
QoQ higher. All product cracks (expect fuel oil) are up but main drivers are diesel
and jet fuel cracks (up 92-102% YoY and 3-10% QoQ). Light-heavy crude spread
also remains strong in 3Q. RIL’s 3Q theoretical refining margin works out to
US$9.8-10.4/bbl. RIL’s 3Q margin is 28-35% higher than its 1H margin of
US$7.7/bbl. RIL’s 1H margin was lower than our theoretical estimate. Even if its
3Q margin is below our theoretical estimate, it is likely to be over US$9/bbl.
BofA ML FY11E achievable; good 4Q also to meet consensus
Strong refining margins are set to ensure good 3Q earnings, which would makeour FY11E EPS of Rs61 (Rs29.8 in 1H) achievable. However to meet consensus
FY11 (5% higher than our estimate), refining strength needs to continue in 4Q.
Strong global oil demand rise in 9M 2010 (up 2.6m b/d) driven by diesel is
encouraging. We expect the strength in diesel cracks and refining to sustain at
least until the January 2011
RIL’s 3Q theoretical refining margin strong
RIL’s 3Q theoretical refining margin at US$9.8-10.4/bbl
RIL’s theoretical refining margin for 3Q to date works out to US$9.8-10.4/bbl.
RIL’s 3Q theoretical margin also highest in seven quarters
3Q theoretical margin sharply higher than 1H margin of US$7.7/bbl
RIL’s 3Q FY11 theoretical refining margin at US$9.8-10.4/bbl is
28-35% higher than its 1H FY11 actual margin US$7.7/bbl
23-30% higher than our theoretical refining margin estimate of US$8.0-
8.8/bbl for 1H
RIL 3Q earnings outlook good
Strong refining margins bode well for 3Q outlook
As discussed RIL’s 3Q FY11 theoretical refining margin at US$9.8-10.4/bbl is at
highest level in seven quarters and is higher than 1H margin of US$7.7/bbl. Thus
strong refining margins are likely to ensure good 3Q earnings for RIL despite a
strong rupee and lower refining volumes due shut down of part capacity.
RIL’s 3Q refining margin likely to be over US$9/bbl
1H actual margin was US$0.3-1.1/bbl lower than theoretical margin
In 1H FY11 RIL’s actual refining margin was US$7.7/bbl, which was US$0.3-
1.1/bbl below our theoretical refining margin estimate of US$8.0-8.8/bbl. Thus 3Q
FY11 refining margin of RIL may also be below our theoretical refining margin
estimate of US$9.8-10.4/bbl. However, it appears that RIL’s 3Q refining margin
may be at least higher than US$9/bbl.
US$9/bbl GRM to ensure 3Q profit strongest in 7 quarters
3Q profit likely to be well over Rs50bn
If RIL’s 3Q FY11E refining margin (GRM) is indeed over US$9/bbl, it would be
RIL’s highest refining margin in seven quarters. GRM of over US$9/bbl should
ensure RIL’s 3Q FY11E earnings is well over Rs50bn and the highest in seven
quarters.
RIL’s FY11E earnings appears achievable
Good 3Q earnings enough to ensure FY11E EPS achieved
2H profit has to be 5% higher than 1H to meet our FY11 estimate
Profit in 3Q FY11E of well over Rs50bn driven by over US$9/bbl refining margin
would be enough to ensure that RIL’s FY11E EPS of Rs61 is achievable. RIL’s
1H FY11 EPS is Rs29.8 while our FY11E EPS estimate is Rs61. RIL’s 1H FY11
profit at Rs98bn is 49% of our FY11 profit estimate of Rs200bn. RIL’s 2H FY11E
profit at Rs103bn needs to be 5% higher than 1H to meet our FY11E estimate.
FY11E EPS achievable despite lower refining volume & stronger rupee
In 2H FY11 RIL would be hit vis-à-vis 1H by
RIL’s refining volumes in 2H FY11E are likely to be 4% lower than 1H. This is
due to maintenance shut down for 22 days of one crude distillation unit
(CDU) at its old refinery from October 25 to November 16.
Stronger rupee in 2H FY11E vis-à-vis in 1H FY11. Exchange rate to date in
2H at Rs44.6 is 3.2% stronger than Rs46.1 in 1H FY11. However rupee has
depreciated to Rs45.8 right now
Good 4Q needed to meet FY11E consensus
Consensus FY11E 5% higher than our estimate
Consensus FY11E profit estimate for RIL at Rs211bn is 5% higher than our
estimate of Rs200bn. To meet consensus FY11 earnings estimate refining
strength would have to continue in 4Q. RIL’s refining margin would have to be
over US$9/bbl in 3Q as well as 4Q to meet consensus FY11E profit of Rs211bn.
FY12E earnings outlook
31% YoY rise in FY12E driven by refining & petrochemicals
15% YoY rise in refining margin and 41% YoY rise in petrochemical EBIT
We are assuming RIL’s FY12E earnings to rise by 31% YoY driven by
15% YoY rise in refining margin to US$8.9/bbl and 38% YoY rise in EBIT
41% YoY rise petrochemical EBIT
20% YoY rise in oil & gas volumes (EBIT up 27% YoY)
4% downside to FY12E EPS from lower oil & gas volumes
KG D6 oil & gas output guided to be lower than level assumed by us
We are assuming KG D6 gas at 69mmscmd and oil at 40k b/d in FY12E. RIL
management has guided that KG D6 oil & gas may remain at 60mmscmd and
30k b/d in FY12. Thus 20% YoY rise in oil & gas volumes is unlikely in FY12.
FY12E EPS at Rs76.2 may be 4% lower than base case EPS of Rs79.6
RIL’s FY12E EPS would be Rs76.2 if KG D6 oil & gas volumes are as guided by RIL
management. This implies 4% downside risk to our FY12E EPS estimate of Rs79.6.
Refining strength needs to sustain to meet our FY12E EPS
Refining margin strength, which we have seen in 3Q FY11, needs to sustain in
FY12E if our FY12E EPS estimate is to be achieved. Our theoretical refining
margin for RIL in 3Q works out to US$9.8-10.4/bbl and we expect its margin to be
over US$9/bbl. RIL’s FY12E refining margin needs to be higher than our current
estimate of US$8.9/bbl to make up for likely E&P profit disappointment and
ensure FY12E EPS is achieved.
Refining & petrochemical may make up for lower E&P EBIT
We have kept RIL’s FY12E earnings unchanged despite risk to oil & gas volumes.
This is because refining and petrochemical EBIT being higher than expected by
us and thus making up for downside in E&P cannot be ruled out.
Retain Buy
Strength in refining margins bodes well for earnings
Singapore refining margins in 3Q FY11 at US$5/bbl are at the highest level in seven
quarters. We also estimate RIL’s 3Q FY11 theoretical refining margin to be strong at
US$9.8-10.4/bbl. We expect RIL’s 3Q refining margins to be at least over US$9/bbl.
RIL’s 3Q earnings outlook would be good and our FY11E EPS estimate would be
achievable if its 3Q refining margin is over US$9/bbl. Refining strength seen in 3Q
needs to sustain in 4Q FY11E if FY11E consensus EPS (5% higher than our
estimate) is to be achieved.
Refining strength seen in 3Q FY11 needs to also sustain in FY12E if our FY12E
earnings estimate is to be achieved.
RIL’s PO of Rs1,206/share implies potential upside of 26%. We retain Buy on RIL
Price objective basis & risk
Reliance Inds (XRELF / RLNIY)
Our PO of Rs1,206 (GDR US$50.96) is based on a sum-of-parts valuation. The
value of the refining and petrochemical business, oil and gas reserves and
resources, as well as its retail business is calculated on DCF basis, using WACC
of 11.8pct. Refining and marketing (Rs391) is 30pct of our PO, E&P valuation
(Rs566) 43pct, petrochemicals (Rs327) 25pct and organized retail (Rs19) 1pct.
Downside risks are (1) 7-year income tax holiday being disallowed on gas
production, which would mean lower cash flow, profit and fair value, (2) Lower
than- expected oil price. (3) Huge disappointments on the E&P front, as we have
valued exploration upside at Rs175/share, (4) Failure in the retail business and
(5) Decline in refining and petrochemical margins being steeper than expected.
Upside risks are (1) Refining and petrochemical margins being better than
expected, (2) Higher-than-expected oil price, (3) Higher than expected reserve
accretion in next 12-24 months and (4) Large acquisitions, which increase fair
value significantly
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