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Reliance Industries (RIL IN)
N: No near-term positive trigger
Q3 FY11 results broadly in line with estimates
Lingering concern on future gas production outlook will
likely keep stock range bound
Maintain Neutral rating, TP of INR1084, and earning estimates
Q3FY11 results in line with our estimates. Reliance Industries reported a PAT of
INR51.4b (growth of 4% q-o-q, 28% y-o-y) versus our estimate of INR51.8bn, based on
robust petrochemical margins and a gross refining margin (GRM) of USD9/barrel (in line
with our estimates). Gas production was 7% lower q-o-q, refinery production was 16.1
million tonne per annum (mtpa), marginally lower sequentially due to temporary
shutdown, while petrochemical production was 5-17% up q-o-q.
Downstream outlook robust but upstream outlook clouded. We expect the current
refining and petrochemical margins to continue into FY12e. However, we believe RIL is
unlikely to ramp-up its natural gas production from current levels of c.52-53m standard
cubic metres/day (mmscmd) near term, in the absence of relevant regulatory approvals for
new development, technical limitations with existing wells and long lead time for critical
deepwater equipment. The current gas production was not only well below the intended
peak rate of 80 mmscmd but also sequentially lower. We believe this steady decline is a
concern and could continue in the absence of remedial measures.
Valuation: Our INR1,084 target price is based on a sum of the parts analysis. We
continue to value the E&P business on DCF for producing properties and reserves
multiple for discovered fields. We value the refining & petrochemical segment on the
average of EV/EBITDA and PE and investments on actual. We maintain our estimates
and target price of INR1084; we reiterate our Neutral rating as our target price implies a
potential return of c10%.
Risks and catalysts: Refining and petrochemical margins, gas production ramp-up from
D6 block and USD/INR exchange rate are risks on the upside and downside. If production
from KG-D6 remains at current levels, we believe our target price could fall by cINR100.
A USD1/barrel change in refining margin would change our target price by INR70, while
a 10% change in petrochemical margins would cause a 5% change.
Investment view
With uncertainty continuing on further ramp-up from the KG-D6 gas fields, we believe investors might
no longer consider RIL as a defensive stock and could start to view it as a proxy for refining and
petrochemical margins. Our estimate of USD8.5/barrel refining margin for the balance of FY11e and for
FY12e assumes regional margins in the mid-cycle levels, while our petrochemical margins estimates are
broadly in line with the forecast by CMAI.
Downstream outlook robust but upstream outlook clouded. We expect the current refining and
petrochemical margins to continue into FY12e. However, we believe RIL is unlikely to ramp-up its
natural gas production from current levels of c.52-53m standard cubic metres/day (mmscmd) near term in
the absence of relevant regulatory approvals for new development, technical limitations with existing
wells and a long lead time for critical deepwater equipment. The current gas production was not only well
below the intended peak rate of 80 mmscmd but also sequentially lower. This steady decline is a concern
and, in our view, could continue in the absence of remedial measures
New initiatives not adding significant value. We not only believe that the volume growth from core
businesses is likely to remain muted for the next few quarters as new petrochemical capacity is likely
only through FY13 and FY14, but also that new initiatives such as shale gas, telecoms and power are
unlikely to result in more than 5-10% CAGR in earnings over FY13-15e. We expect investment of
cUSD20bn over FY11-13 but the corresponding net present value (NPV) is unlikely to be more than
USD8bn, or 10% of current EV (USD82bn). Although RIL can leverage its strength in the power
business, we think its attempts to diversify into new areas such as retail, telecommunications and
financial sectors may stretch management. We see the current contraction in PE multiple as long term and
not just an overreaction to disappointment with the E&P business.
We value the upstream business on a DCF basis for the producing blocks and on a reserve multiple basis
for the discovered blocks. We value RIL’s downstream business using the average of 13x PE and 8x
EV/EBITDA multiples on FY12e earnings (unchanged), which is in line with regional peers. We also
value the recent shale acquisitions, Pioneer and Atlas Energy, on a DCF basis. Our FY11 and FY12 EPS
estimates are 5% and 8%, respectively, below consensus.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppt above and
below our hurdle rate for Indian stocks of 11%, or 6-16% around the current share price. Our unchanged
target price of INR1,084 implies a return of c10% including the dividend yield, which is within this band,
hence we maintain Neutral.
Sensitivity analysis and risks
Key risks to our earnings and valuation, both on the upside and downside, are refining margins,
petrochemical margins and production from KG-D6 being different from our assumptions.
Sensitivity to production ramp-up from KG-D6 block: If production from KG-D6 remains at the
current level of 60 Mmcm/d without reaching the stated peak of 80 Mmcm/d, our target price would fall
by cINR100/share.
Sensitivity of GRM: USD1/bbl change in gross margin would change our FY12e EPS by INR5 (c7%)
and target price by INR70..
Sensitivity of petrochemical margins: Increase in petrochemical margins by c10% would raise our
FY12e EPS by 5%.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RIL IN)
N: No near-term positive trigger
Q3 FY11 results broadly in line with estimates
Lingering concern on future gas production outlook will
likely keep stock range bound
Maintain Neutral rating, TP of INR1084, and earning estimates
Q3FY11 results in line with our estimates. Reliance Industries reported a PAT of
INR51.4b (growth of 4% q-o-q, 28% y-o-y) versus our estimate of INR51.8bn, based on
robust petrochemical margins and a gross refining margin (GRM) of USD9/barrel (in line
with our estimates). Gas production was 7% lower q-o-q, refinery production was 16.1
million tonne per annum (mtpa), marginally lower sequentially due to temporary
shutdown, while petrochemical production was 5-17% up q-o-q.
Downstream outlook robust but upstream outlook clouded. We expect the current
refining and petrochemical margins to continue into FY12e. However, we believe RIL is
unlikely to ramp-up its natural gas production from current levels of c.52-53m standard
cubic metres/day (mmscmd) near term, in the absence of relevant regulatory approvals for
new development, technical limitations with existing wells and long lead time for critical
deepwater equipment. The current gas production was not only well below the intended
peak rate of 80 mmscmd but also sequentially lower. We believe this steady decline is a
concern and could continue in the absence of remedial measures.
Valuation: Our INR1,084 target price is based on a sum of the parts analysis. We
continue to value the E&P business on DCF for producing properties and reserves
multiple for discovered fields. We value the refining & petrochemical segment on the
average of EV/EBITDA and PE and investments on actual. We maintain our estimates
and target price of INR1084; we reiterate our Neutral rating as our target price implies a
potential return of c10%.
Risks and catalysts: Refining and petrochemical margins, gas production ramp-up from
D6 block and USD/INR exchange rate are risks on the upside and downside. If production
from KG-D6 remains at current levels, we believe our target price could fall by cINR100.
A USD1/barrel change in refining margin would change our target price by INR70, while
a 10% change in petrochemical margins would cause a 5% change.
Investment view
With uncertainty continuing on further ramp-up from the KG-D6 gas fields, we believe investors might
no longer consider RIL as a defensive stock and could start to view it as a proxy for refining and
petrochemical margins. Our estimate of USD8.5/barrel refining margin for the balance of FY11e and for
FY12e assumes regional margins in the mid-cycle levels, while our petrochemical margins estimates are
broadly in line with the forecast by CMAI.
Downstream outlook robust but upstream outlook clouded. We expect the current refining and
petrochemical margins to continue into FY12e. However, we believe RIL is unlikely to ramp-up its
natural gas production from current levels of c.52-53m standard cubic metres/day (mmscmd) near term in
the absence of relevant regulatory approvals for new development, technical limitations with existing
wells and a long lead time for critical deepwater equipment. The current gas production was not only well
below the intended peak rate of 80 mmscmd but also sequentially lower. This steady decline is a concern
and, in our view, could continue in the absence of remedial measures
New initiatives not adding significant value. We not only believe that the volume growth from core
businesses is likely to remain muted for the next few quarters as new petrochemical capacity is likely
only through FY13 and FY14, but also that new initiatives such as shale gas, telecoms and power are
unlikely to result in more than 5-10% CAGR in earnings over FY13-15e. We expect investment of
cUSD20bn over FY11-13 but the corresponding net present value (NPV) is unlikely to be more than
USD8bn, or 10% of current EV (USD82bn). Although RIL can leverage its strength in the power
business, we think its attempts to diversify into new areas such as retail, telecommunications and
financial sectors may stretch management. We see the current contraction in PE multiple as long term and
not just an overreaction to disappointment with the E&P business.
We value the upstream business on a DCF basis for the producing blocks and on a reserve multiple basis
for the discovered blocks. We value RIL’s downstream business using the average of 13x PE and 8x
EV/EBITDA multiples on FY12e earnings (unchanged), which is in line with regional peers. We also
value the recent shale acquisitions, Pioneer and Atlas Energy, on a DCF basis. Our FY11 and FY12 EPS
estimates are 5% and 8%, respectively, below consensus.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppt above and
below our hurdle rate for Indian stocks of 11%, or 6-16% around the current share price. Our unchanged
target price of INR1,084 implies a return of c10% including the dividend yield, which is within this band,
hence we maintain Neutral.
Sensitivity analysis and risks
Key risks to our earnings and valuation, both on the upside and downside, are refining margins,
petrochemical margins and production from KG-D6 being different from our assumptions.
Sensitivity to production ramp-up from KG-D6 block: If production from KG-D6 remains at the
current level of 60 Mmcm/d without reaching the stated peak of 80 Mmcm/d, our target price would fall
by cINR100/share.
Sensitivity of GRM: USD1/bbl change in gross margin would change our FY12e EPS by INR5 (c7%)
and target price by INR70..
Sensitivity of petrochemical margins: Increase in petrochemical margins by c10% would raise our
FY12e EPS by 5%.
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