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PAT in line with estimates; GRMs lower; petchem, E&P better
Reliance Industries’ (RIL) PAT, of INR 49.23 bn, was in line with our estimated
INR 48.96 bn. There were, however, variations in segmental performance.
Earnings in the refining segment were lower due to lower than estimated GRMs,
while EBIT in petrochemicals and oil & gas was higher than our estimates.
RIL guided that the pause in ramp-up of KG-D6 gas production may continue,
and gas and oil production would be maintained at 60 mmscmd and 30 kbpd,
respectively, till most of FY12. While two development wells were drilled in
Q2FY11, hooking the same to production line will be possible only after RIL is
comfortable on the reservoir stability. We had earlier assumed RIL’s gas
production at 60 mmscmd for both FY11 and FY12. The O&G segment reported
EBIT of INR 17.1 bn, up 39% Y-o-Y, but 11% lower Q-o-Q due to lower gas/oil
production. Production, in turn, was lower due to shutdown in Panna-Mukta field
during Q2FY11; KG-D6 natural gas production, at 59.1 mmscmd, was 1.0%
lower Q-o-Q. EBIT in the gas segment was higher than estimates due to higher
realisation and lower costs.
GRMs below expectations at USD 7.9/bbl; best ever refinery throughput
RIL reported an impressive throughput of 16.9 MMT (above estimates) and
utilisation of 109%. However, GRMs disappointed at USD 7.9/bbl against our
estimated USD 8.25/bbl, though improved 31.7% Y-o-Y and 8.2% Q-o-Q. Hence,
refining EBIT, at INR 21.9 bn, was up 62.7% Y-o-Y and 7.7% Q-o-Q.
Outlook and valuations: Operational volumes bleak; maintain ‘HOLD’
We are reducing our FY11 and FY12 PAT estimates by 2.6% and 1.9%,
respectively, to incorporate marginally lower GRMs and higher depreciation.
Further, we are rolling forward the SOTP fair value from March 2011 to March
2012, and now estimate the fair value SOTP at INR 1,251/share. We are positive
on RIL’s capability to stress asset (higher refining capacity utilisation) and are
optimistic on industry refining margins. However, we believe that RIL may not
see increase in operational volumes until clarity emerges in the exploration
blocks. RIL is currently undergoing capex in projects that have long gestation
periods – off-gas cracker, polyester capacities and shale gas. Hence, we
maintain ‘HOLD/Sector Outperformer’ on the stock. At INR 1,096, the stock
is currently trading at FY12E P/E of 14.1x and FY12E EV/EBITDA of 8.1x.
Mixed bag of segmental results; earnings in line with estimates
Revenues for Q2FY11 dipped marginally by 1.3% Q-o-Q, to INR 574.8 bn. Revenue
growth was robust at 22.7% Y-o-Y on higher refining volumes, refining margins and
crude prices. Q2FY11 top-line was broadly in line with our estimates of INR 559.7 bn.
EBIT, at INR 61 bn, was up 27.7% Y-o-Y and 1.4% Q-o-Q, in line with our estimates. Yo-
Y EBIT improvement was driven by improvement in refining (throughput and margins)
and E&P EBIT (ramp-up of KG-D6 gas production). Q-o-Q EBIT improvement was driven
by refining (throughput and margins) and petrochemicals segments (higher volumes),
offset by the E&P segment. Employee expenses, at INR 6.6 bn, were up 10.7% Y-o-Y
due to higher payouts.
Interest expenses increased 17.3% Y-o-Y, to INR 5.42 bn, due to higher debt and
lower capitalisation of the interest paid, partly offset by lower interest rates. Other
income, at INR 6.72 bn, increased 7% Y-o-Y.
Depreciation expenses dipped marginally Q-o-Q, to INR 33.8 bn. Y-o-Y increase of
38.9% was account of depreciation in the O&G segment and increased depreciation in
the refining segment.
Tax rate was slightly ahead of estimates at 19.9% (Q2FY11) compared with 19.7% in
Q1FY11.
Consequently, core profit increased 27.8% Y-o-Y and 1.5% Q-o-Q, to INR 49.23 bn,
in line with our estimates of INR 48.96 bn.
O&G: Benefits from higher KG-D6 crude production
RIL’s O&G segment reported EBIT of INR 17.1 bn, up 39% Y-o-Y, due to higher gas
production (59.1 mmscmd in Q2FY11 versus 34.2 mmscmd in Q2FY10), but was 11%
down Q-o-Q due to lower production from PMT fields. PMT oil and crude production was
lower due to unplanned shutdown at the Panna-Mukta fields in Q2FY11. Production from
Panna-Mukta has resumed in the current quarter.
KG-D6 crude production, at 26.23 kbpd, improved 3.4% Q-o-Q. However, the
management has guided that the pause in ramp-up of KG-D6 gas production may
continue and gas and oil production would be maintained at 60 mmscmd and 30 kbpd,
respectively, till most of FY12. While two development wells were drilled in Q2FY11,
hooking the same to production line will be possible only after RIL is comfortable on the
reservoir stability. We had earlier assumed RIL’s gas production at 60 mmscmd for both
FY11 and FY12.
Panna-Mukta crude production, at 0.04 MMT, dropped 70.2% Q-o-Q due to shutdown in
the production during Q2FY11, while gas production also eased to 33 mmscm (down
77.9% Q-o-Q). Tapti condensate production, at 0.01 MMT, was down 8.1% Q-o-Q and its
natural gas production was lower at 202 mmscm (down 15.1% Y-o-Y and 14.1% Q-o-Q)
due to the natural decline in the fields. RIL plans to drill three infill wells in mid-Tapti to
arrest the decline in natural gas production.
During Q2FY11, two discoveries were notified to the DGH:
• Dhirubhai-51 in Well AR1 in CB10 block
• Dhirubhai-52 in Well W1 in KGVD3 block
This is in addition to the four discoveries notified to DGH in Q1FY11:
• Dhirubhai-47 in Well AF1 in CB10 block
• Dhirubhai-48 in Well AJ1 in CB10 block
• Dhirubhai-49 in Well AT1 in CB10 block
Status of other blocks / fields
• KG-D6 satellite fields: As mentioned in Q1FY11, RIL maintained that predevelopment
activities in the KG-D6 satellite fields have started. It has put the KGD6-
R1 discovery in fast track mode. While the company plans an integrated
development plan, the production may be brought about in a serial fashion. On the
timelines, the firm will take six months to prepare the development plan.
• NEC-25 block: The development plan is ready to be submitted, but there have
been regulatory delays in the block. FDP of the block may be submitted soon.
• KG-D9 block: Discussions have been recently completed with Hardy (holds 10%
participating interest) and the block may be taken up for drilling in Q3FY11.
• MN-D4 block: While there are good prospects/leads, the block has got rig
moratorium. This may lead to priorities being given to other blocks where timelines
are stretched.
• CB-10 A&B block: The appraisal work programme has been submitted and
awaiting approval from the government.
Exploration rigs: Currently, two deepwater rigs are under operation for exploration and
one additional rig is expected in H2FY11.
Refining GRM lower than estimate; throughput at impressive 109%
RIL has reported best ever throughput at 16.91 MMT (higher than estimates) or capacity
utilisation of 109.1%, given a challenging industry environment. However, GRM
disappointed at USD 7.9/bbl against our estimate of USD 8.25/bb, though improved
31.7% Y-o-Y and 8.2% Q-o-Q. Consequently, refining EBIT, at INR 21.9 bn, improved
62.7% Y-o-Y and 7.7% Q-o-Q. We have reduced our FY11E and FY12E GRM to USD
8.25/bbl (from USD 8.5/bbl) and USD 10.5/bbl (from USD 11.0/bbl), respectively, to
account for lower GRM in Q2FY11. While we are positive on GRM, we believe that RIL’s
FY12 GRM will be closer to USD 10.5/bbl than earlier estimated USD 11.0/bbl.
Export of refined products was at 19.7 MMT (USD 13.4 bn) in Q2FY11 against 13.2 MMT
(USD 7.5 bn) in Q2FY10 on incremental export volumes from SEZ refinery.
RIL has shut down its CDU-I of the old refinery (50% capacity of nameplate 33.0
mmtpa) for 20 days. Hence, throughput in Q3FY11 will be correspondingly lower.
• Dhirubhai-50 in Well AN1 in CB10 block
Pick up in petrochemicals volumes
In the petrochemical segment, EBIT was up 0.1% Y-o-Y and 7% Q-o-Q, to INR 21.97 bn.
Petrochemical volumes, at 5.4 MMT, was flat Y-o-Y, but higher 10.2% Q-o-Q. Production
volumes in Q2FY11 were higher Q-o-Q due to 14 days of shutdown at Hazira and 44
days at Nagothane in Q1FY11.
Within the polyester segment, PET has witnessed 29% Y-o-Y growth in demand due to
increased beverages and bottled water demand during H1FY11. EBIT margins in the
petrochemicals business improved due to the increased margins in the polyester chain.
Higher cotton prices led to increased prices of polyester yarns/fibers. Shutdown of the
Middle East MEG capacity led to increase in MEG margins.
Ethylene production, at 432 KT, and propylene production, at 182 KT in Q2FY11, was
ahead of estimates due to higher production from the SEZ refinery. Ethylene cracker
margins were lower due to partial impact of increased capacities in Middle East.
RIL shared further configuration of the off-gas cracker during the analyst meet:
• Ethylene capacity of 1.4 mmtpa, propylene at 0.1 mmtpa
• Total capex of USD 4.0 bn
• Time to start: 4 years from July 2010
• MEG capacity = 700 KTPA
• LLDPE capacity = 550 KTPA
• LDPE capacity = 450 KTPA
Other highlights
• Net cash capital expenditure towards projects was INR 33 bn in H1FY11. Cash capex
during Q2FY11 was INR 18.8 bn, of which, INR 13.0 bn was in E&P, INR 3.0 bn in
refining, and INR 2.8 bn in others.
• Outstanding debt at Q2FY11 end was INR 682 bn, higher by INR 57 bn as on March
2010. Cash and cash equivalents at quarter end were INR 293.5 bn.
Revising estimates due to marginally lower GRMs and higher depreciation
We are reducing FY11/FY12 refining throughput estimates marginally due to planned
shutdown in November, and lowering FY11 and FY12 GRMs to USD 8.25/bbl
(incorporating lower Q2FY11 GRMs) and 10.5/bbl, respectively. We have also increased
the depreciation numbers to incorporate the higher depreciation for the firm. Hence, we
are reducing the FY11E and FY12E PAT by 2.6% and 1.9%, respectively. Our new FY11
and FY12 EPS estimates are INR 65.9 and INR 77.7 respectively.
Outlook and valuations: Operational volumes bleak; maintain ‘HOLD’
We are rolling forward the SOTP fair value from March 2011 to March 2012, and now
estimate the fair value SOTP at INR 1,251/share. We are positive on RIL’s capability to
stress asset (higher refining capacity utilisation) and are optimistic on industry refining
margins. However, we believe that RIL may not see rise in operational volumes until
there is clarity on the exploration blocks. RIL is currently undergoing capex in projects
that have long gestation periods – off-gas cracker, polyester capacities and shale gas.
Hence, we maintain our ‘HOLD/Sector Outperformer’ recommendation on the stock.
At INR 1,096, the stock is trading at FY12E P/E of 14.1x and FY12E EV/EBITDA of 8.1x.
Company Description
RIL is the largest private player in the refining, petrochemical, and E&P sectors in India.
Historically RIL’s refining and petrochemical segments have been contributing ~90% to
its total revenues, but that is set to change, as the company scales up its E&P business
and is set to emerge as a integrated E&P player. RIL is also venturing into areas of
consumer retailing and urban infrastructure.
Investment Theme
RIL’s strength lies in its ability to build businesses of global size and scale and execute
complex, time-critical, and capital-intensive projects, which will prove advantageous in
its huge plans in the E&P sector, organised retailing, and SEZ infrastructure. Also, there
could be a potential upward revision to our estimated in-place reserves. With its foray
into consumer retailing and SEZ infrastructure, we believe, it is an ideal company to play
the India story.
Key Risks
RIL benefits from protected refinery margins in the Indian market ,due to duty
differential between products and crude. Reduction in the duty differential will be
negative for the company.
Rupee appreciation may impact negatively as RIL is positively leveraged to the
depreciating currency.
Slow down in global demand could impact RIL’s refining and chemical margins.
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