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3QFY11 results largely in line with expectations: RIL reported EBITDA of Rs95.4b (v/s our estimate of Rs99.4b)
for 3QFY11, up 22% YoY and 2% QoQ. Lower than expected EBITDA was due to lower than estimated E&P profits,
partially compensated by higher petchem margins. Despite lower than estimated EBITDA, PAT was in-line at Rs51.4b
(+28% YoY and +4% QoQ) due to (1) lower DD&A expenses, (2) higher other income, and (3) lower effective tax rate.
GRM at US$9/bbl; premium of US$3.5/bbl over Singapore GRM: RIL's GRM for the quarter was US$9/bbl (v/s
our estimate of US$9.5/bbl) as against US$5.9/bbl in 3QFY10 and US$7.9/bbl in 2QFY11. Despite improvement in
the Light-Heavy crude price differential, RIL's GRM premium over Singapore GRM contracted from US$3.7/bbl in
2QFY11 to US$3.5/bbl in 3QFY11 due to partial replacement of KG-D6 gas by higher priced LNG.
No clarity on KG-D6 ramp-up: RIL management provided neither any incremental guidance on KG-D6 ramp-up nor
any update on the reservoir studies currently underway. In the previous quarter, the management had stated that
increase in KG-D6 production is unlikely before 4QFY12.
Petchem business catches limelight in FY11; outlook positive: Petchem EBIT margin was 15.2% v/s 14.6% in
2QFY11 and 13.9% in 3QFY10. Management, despite new Middle East capacities expect petchem margin to sustain
due to higher demand in China and India.
Key things to watch: (1) Results of reservoir studies of KG-D6 and volume ramp-up, (2) clarity on 7-year income tax
holiday for KG-D6 (we model tax holiday), (3) margin trend in refining and petchem, (4) execution on announced
downstream projects (off-gases cracker, PX/PTA expansion and IGCC), and (5) developments on its BWA foray.
Cutting estimates; SOTP-based target price at Rs971: We are cutting our EPS estimates by 2.5% for FY12 to
Rs71.7 and by 4.8% for FY13 to Rs84.9 to factor in the change in our KG-D6 gas production and exchange rate (Rs/
US$) assumptions. We are revising our KG-D6 gas production assumption from 60/80mmsmcd to 55/60mmsmcd for
FY12/FY13. We are changing our Rs/US$ assumption from 44.5/43.0 to 45/44.0 for FY12/FY13. Our FY11E EPS is
up by 2% due to increase in 4Q GRM from US$8.5/bbl to US$9.5/bbl and change in Rs/US$ rate from 44.5 to 45. Our
SOTP-based target price is Rs971. Maintain Neutral.
EBITDA marginally below our estimate; PAT in-line
Reliance Industries (RIL) reported EBITDA of Rs95.4b (v/s our estimate of Rs99.4b) for
3QFY11, up 22% YoY and 2% QoQ. Lower than expected EBITDA was due to lower
than estimated E&P profits, partially compensated by higher petchem margins.
PAT was Rs51.4b (in-line), up 28% YoY and 4% QoQ. Despite lower EBITDA, PAT was
in-line due to (1) lower DD&A expenses at Rs33.6b (v/s our estimate of Rs34.9b) due to
lower PMT depletion, (2) higher other income at Rs7.4b (v/s our estimate of Rs6.8b), and
(3) lower effective tax rate at 19.5% (v/s our estimate of Rs20.1%).
GRM at US$9/bbl; premium over Singapore reduced QoQ due to lower
KG-D6 gas usage
Refinery EBIT at Rs24.4b was up 77% YoY and 11% QoQ, primarily due to 53% YoY
and 14% QoQ increase in GRM.
3QFY11 GRM was US$9/bbl, up 53% YoY and 14% QoQ. Despite improvement in
the Light-Heavy crude price differential, RIL's GRM premium over Singapore GRM
contracted due to partial replacement of KG-D6 gas by higher priced LNG.
Refinery throughput stood at 16.1mmt; (down 2% YoY and 5% QoQ) due to shutdown
in one of its crude units.
RIL currently operates 695 fuel retail outlets.
KG-D6 gas usage in refining can be under threat. As against 8mmscmd consumption
in previous quarters, RIL is currently consuming ~4mmscmd of KG-D6 gas (allocation
of ~2.4mmscmd) and ~5mmscmd of LNG. Production from KG-D6 has declined from
60mmscmd to 53mmscmd. Any further decline might result in shortage for RIL and it
will have to revert to refinery fuel or LNG.
RIL management indicated a positive outlook on refining margins, led by improvement
in the global economy. We currently model GRM of US$9/bbl for FY12 and US$10.2/
bbl for FY13.
E&P: no clarity on KG-D6 ramp-up; we now model volumes at 55/60mmscmd
for FY12/FY13 v/s earlier 60/80mmscmd
E&P profitability remained low: RIL reported E&P EBIT (KG-D6 and PMT) at
Rs15b (v/s Rs17.1b in 2QFY11 and Rs4.9b in 3QFY10). Overall E&P EBIT was
36% (v/s 39.6% in 2QY11 and 41.8% in 3QFY10). E&P profitability continues to be
impacted by higher depletion charge, resulting in lower EBIT margin.
KG-D6 averaged 55.8mmscmd in 3QFY11: KG-D6 volumes averaged
55.8mmsmcd in 3QFY11 v/s 48mmscmd in 3QFY10 and 58mmscmd in 2QFY11.
PMT fields commenced production after shutdown in 2QFY11 and gross production
averaged 10.7mmscmd v/s 8.5mmscmd in 2QFY11 and 13.5mmscmd in 3QFY10.
Discussion with DGH to have cascading impact on RIL's domestic E&P
portfolio: RIL indicated that it is also having discussions with DGH regarding its E&P
plan for all its domestic blocks. We believe this could lead to delays in the development
of its key blocks like satellite fields and NEC-25, which were in advanced stages. We
do not expect the development work to begin on these blocks for another 2-3 quarters
and post that production would require another 3-4 years to commence. Hence, beyond
KG-D6, there are no material production starts for the next 2-3 years.
Petrochemicals: polyester boosts margins; overall petchem outlook positive
RIL's petchem margin stood at 15.2% (v/s 14.6% in 2QFY11 and 13.9% in 3QFY10).
QoQ increase in the petchem EBIT to Rs24.2b v/s Rs22b in 2QFY11 was primarily
led by volume increase. Total petchem production increased by 4% to 5.6mmtpa.
In 3QFY11, PE and PP prices were up by 4.8% and 5.1%, respectively, offset by
17% increase in naphtha prices. Integrated PE and PP spreads were down 9% and
5%, respectively. However, polyester business has continued to show improvement in
margins, with PSF and POY integrated margins up 24% QoQ and 17% QoQ,
respectively. Polyester volumes were up 5% QoQ.
RIL indicated that most of the Middle Eat capacities have already being commissioned
and new supply has been absorbed by increasing demand in India and China.
Management expects the petrochemicals sector to be the beneficiary of strong demand
and has a positive outlook.
Other highlights
Gross debt increased by Rs20b QoQ to Rs702b.
Net debt stood at Rs383b v/s Rs388b in 2QFY11. Increase of Rs24.8b in cash and
cash equivalents has contributed to the decline in net debt. 3QFY11 has seen the
highest ever cash balance.
Interest capitalized during the quarter was Rs1.3b (v/s Rs1b in 3QFY10 and Rs1.3b in
2QFY11).
Other income was Rs7.4b, up 46% YoY and 10% QoQ.
Effective tax rate was 19.5% v/s 19.9% in 2QFY11 and 20% in 3QFY10.
Valuation and view
Our assumptions
We model average gas production of 55/60mmscmd for FY12/13.
Well-head gas price of US$4.2/mmbtu. We continue to factor in tax holiday on KGD6
gas profits.
GRM of US$9/bbl in FY12 and US$10.2/bbl in FY13.
Key things to watch
Results of reservoir studies of KG-D6 and volume ramp up guidance
Clarity on 7-year income tax holiday for KG-D6 gas (we model tax holiday)
Margin trend in refining and petchem
Execution on downstream projects announced in AGM (off-gases cracker, PX/PTA
expansion and IGCC)
Developments on its BWA foray
Cutting estimates; SOTP-based target price at Rs971
We are cutting our EPS estimates by 2.5% for FY12 to Rs71.7 and by 4.8% for FY13 to
Rs84.9 to factor in the change in our KG-D6 gas production and exchange rate assumptions.
We are revising our KG-D6 gas production assumption from 60/80mmsmcd to 55/
60mmsmcd for FY12/FY13. We are changing our Rs/US$ assumption from 44.5/43.0 to
45/44.0 for FY12/FY13. Our FY11E EPS is up by 2% due to increase in 4Q GRM from
US$8.5/bbl to US$9.5/bbl and change in Rs/US$ rate from 44.5 to 45. Our SOTP-based
target price is Rs971. Maintain Neutral.
Company description
Reliance Industries (RIL), a Fortune-500 company, is India's
largest private sector entity, with a turnover of US$40b and
net profit of US$3.5b. It has reported historically high
CAGRs of over 22% in topline and bottomline through
backward integration in energy chain (textiles, petchem,
refining and E&P) and is now moving into high growth areas
like retail and SEZ.
Key investment arguments
E&P upside now seems back-ended: Though E&P
would be a long-term driver for the company, in the
medium term, growth seems to be subdued, led by
delays in the ramp-up of KG-D6 and delays in the
approval of development plans for satellite fields and
NEC-25. RIL is the largest exploration acreage holder
in the private sector in India. Post its world-scale gas
discovery in 2002 in KG-D6, it has reported more than
50 discoveries.
Refining - high complexity to help RIL: Uptick in GRM,
led by economic recovery and cold weather will help
RIL to post decent refinery margins in coming quarters.
We expect refining margins to remain range-bound at
US$5-6/bbl, as impending 1.4mmbbl/d of new capacity
would start supporting incremental demand.
Petrochemicals - increasing demand in India and China
helps: Growing demand in India and China has helped
petchem margins to remain robust despite new
capacities getting commissioned in the Middle East and
China. Strong domestic demand will help RIL to push
through its volumes in India.
Key investment risks
Further delays in the KG-D6 gas volume ramp-up.
Our estimates could be adversely impacted by lower
than expected refining and petchem margins.
Recent developments
RIL entered into three JVs, with three different USbased
shale gas companies: (1) with Atlas Energy (RIL
stake of 40%) to develop Marcellus shale acreage, (2)
with Pioneer Natural Resources (RIL stake of 45%) in
its Eagle Ford shale acreage, and (3) with Carizzo Oil
and Gas (RIL 60% stake) in Marcellus shale acreage.
RIL acquired 95% equity stake in Infotel, which has
Broadband Wireless Access (BWA) spectrum license
for 22 circles.
Valuation and view
Adjusted for treasury shares, RIL trades at 15x FY12E
adjusted EPS of Rs72. Our SOTP-based target price
for RIL is Rs971/share. Maintain Neutral
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
3QFY11 results largely in line with expectations: RIL reported EBITDA of Rs95.4b (v/s our estimate of Rs99.4b)
for 3QFY11, up 22% YoY and 2% QoQ. Lower than expected EBITDA was due to lower than estimated E&P profits,
partially compensated by higher petchem margins. Despite lower than estimated EBITDA, PAT was in-line at Rs51.4b
(+28% YoY and +4% QoQ) due to (1) lower DD&A expenses, (2) higher other income, and (3) lower effective tax rate.
GRM at US$9/bbl; premium of US$3.5/bbl over Singapore GRM: RIL's GRM for the quarter was US$9/bbl (v/s
our estimate of US$9.5/bbl) as against US$5.9/bbl in 3QFY10 and US$7.9/bbl in 2QFY11. Despite improvement in
the Light-Heavy crude price differential, RIL's GRM premium over Singapore GRM contracted from US$3.7/bbl in
2QFY11 to US$3.5/bbl in 3QFY11 due to partial replacement of KG-D6 gas by higher priced LNG.
No clarity on KG-D6 ramp-up: RIL management provided neither any incremental guidance on KG-D6 ramp-up nor
any update on the reservoir studies currently underway. In the previous quarter, the management had stated that
increase in KG-D6 production is unlikely before 4QFY12.
Petchem business catches limelight in FY11; outlook positive: Petchem EBIT margin was 15.2% v/s 14.6% in
2QFY11 and 13.9% in 3QFY10. Management, despite new Middle East capacities expect petchem margin to sustain
due to higher demand in China and India.
Key things to watch: (1) Results of reservoir studies of KG-D6 and volume ramp-up, (2) clarity on 7-year income tax
holiday for KG-D6 (we model tax holiday), (3) margin trend in refining and petchem, (4) execution on announced
downstream projects (off-gases cracker, PX/PTA expansion and IGCC), and (5) developments on its BWA foray.
Cutting estimates; SOTP-based target price at Rs971: We are cutting our EPS estimates by 2.5% for FY12 to
Rs71.7 and by 4.8% for FY13 to Rs84.9 to factor in the change in our KG-D6 gas production and exchange rate (Rs/
US$) assumptions. We are revising our KG-D6 gas production assumption from 60/80mmsmcd to 55/60mmsmcd for
FY12/FY13. We are changing our Rs/US$ assumption from 44.5/43.0 to 45/44.0 for FY12/FY13. Our FY11E EPS is
up by 2% due to increase in 4Q GRM from US$8.5/bbl to US$9.5/bbl and change in Rs/US$ rate from 44.5 to 45. Our
SOTP-based target price is Rs971. Maintain Neutral.
EBITDA marginally below our estimate; PAT in-line
Reliance Industries (RIL) reported EBITDA of Rs95.4b (v/s our estimate of Rs99.4b) for
3QFY11, up 22% YoY and 2% QoQ. Lower than expected EBITDA was due to lower
than estimated E&P profits, partially compensated by higher petchem margins.
PAT was Rs51.4b (in-line), up 28% YoY and 4% QoQ. Despite lower EBITDA, PAT was
in-line due to (1) lower DD&A expenses at Rs33.6b (v/s our estimate of Rs34.9b) due to
lower PMT depletion, (2) higher other income at Rs7.4b (v/s our estimate of Rs6.8b), and
(3) lower effective tax rate at 19.5% (v/s our estimate of Rs20.1%).
GRM at US$9/bbl; premium over Singapore reduced QoQ due to lower
KG-D6 gas usage
Refinery EBIT at Rs24.4b was up 77% YoY and 11% QoQ, primarily due to 53% YoY
and 14% QoQ increase in GRM.
3QFY11 GRM was US$9/bbl, up 53% YoY and 14% QoQ. Despite improvement in
the Light-Heavy crude price differential, RIL's GRM premium over Singapore GRM
contracted due to partial replacement of KG-D6 gas by higher priced LNG.
Refinery throughput stood at 16.1mmt; (down 2% YoY and 5% QoQ) due to shutdown
in one of its crude units.
RIL currently operates 695 fuel retail outlets.
KG-D6 gas usage in refining can be under threat. As against 8mmscmd consumption
in previous quarters, RIL is currently consuming ~4mmscmd of KG-D6 gas (allocation
of ~2.4mmscmd) and ~5mmscmd of LNG. Production from KG-D6 has declined from
60mmscmd to 53mmscmd. Any further decline might result in shortage for RIL and it
will have to revert to refinery fuel or LNG.
RIL management indicated a positive outlook on refining margins, led by improvement
in the global economy. We currently model GRM of US$9/bbl for FY12 and US$10.2/
bbl for FY13.
E&P: no clarity on KG-D6 ramp-up; we now model volumes at 55/60mmscmd
for FY12/FY13 v/s earlier 60/80mmscmd
E&P profitability remained low: RIL reported E&P EBIT (KG-D6 and PMT) at
Rs15b (v/s Rs17.1b in 2QFY11 and Rs4.9b in 3QFY10). Overall E&P EBIT was
36% (v/s 39.6% in 2QY11 and 41.8% in 3QFY10). E&P profitability continues to be
impacted by higher depletion charge, resulting in lower EBIT margin.
KG-D6 averaged 55.8mmscmd in 3QFY11: KG-D6 volumes averaged
55.8mmsmcd in 3QFY11 v/s 48mmscmd in 3QFY10 and 58mmscmd in 2QFY11.
PMT fields commenced production after shutdown in 2QFY11 and gross production
averaged 10.7mmscmd v/s 8.5mmscmd in 2QFY11 and 13.5mmscmd in 3QFY10.
Discussion with DGH to have cascading impact on RIL's domestic E&P
portfolio: RIL indicated that it is also having discussions with DGH regarding its E&P
plan for all its domestic blocks. We believe this could lead to delays in the development
of its key blocks like satellite fields and NEC-25, which were in advanced stages. We
do not expect the development work to begin on these blocks for another 2-3 quarters
and post that production would require another 3-4 years to commence. Hence, beyond
KG-D6, there are no material production starts for the next 2-3 years.
Petrochemicals: polyester boosts margins; overall petchem outlook positive
RIL's petchem margin stood at 15.2% (v/s 14.6% in 2QFY11 and 13.9% in 3QFY10).
QoQ increase in the petchem EBIT to Rs24.2b v/s Rs22b in 2QFY11 was primarily
led by volume increase. Total petchem production increased by 4% to 5.6mmtpa.
In 3QFY11, PE and PP prices were up by 4.8% and 5.1%, respectively, offset by
17% increase in naphtha prices. Integrated PE and PP spreads were down 9% and
5%, respectively. However, polyester business has continued to show improvement in
margins, with PSF and POY integrated margins up 24% QoQ and 17% QoQ,
respectively. Polyester volumes were up 5% QoQ.
RIL indicated that most of the Middle Eat capacities have already being commissioned
and new supply has been absorbed by increasing demand in India and China.
Management expects the petrochemicals sector to be the beneficiary of strong demand
and has a positive outlook.
Other highlights
Gross debt increased by Rs20b QoQ to Rs702b.
Net debt stood at Rs383b v/s Rs388b in 2QFY11. Increase of Rs24.8b in cash and
cash equivalents has contributed to the decline in net debt. 3QFY11 has seen the
highest ever cash balance.
Interest capitalized during the quarter was Rs1.3b (v/s Rs1b in 3QFY10 and Rs1.3b in
2QFY11).
Other income was Rs7.4b, up 46% YoY and 10% QoQ.
Effective tax rate was 19.5% v/s 19.9% in 2QFY11 and 20% in 3QFY10.
Valuation and view
Our assumptions
We model average gas production of 55/60mmscmd for FY12/13.
Well-head gas price of US$4.2/mmbtu. We continue to factor in tax holiday on KGD6
gas profits.
GRM of US$9/bbl in FY12 and US$10.2/bbl in FY13.
Key things to watch
Results of reservoir studies of KG-D6 and volume ramp up guidance
Clarity on 7-year income tax holiday for KG-D6 gas (we model tax holiday)
Margin trend in refining and petchem
Execution on downstream projects announced in AGM (off-gases cracker, PX/PTA
expansion and IGCC)
Developments on its BWA foray
Cutting estimates; SOTP-based target price at Rs971
We are cutting our EPS estimates by 2.5% for FY12 to Rs71.7 and by 4.8% for FY13 to
Rs84.9 to factor in the change in our KG-D6 gas production and exchange rate assumptions.
We are revising our KG-D6 gas production assumption from 60/80mmsmcd to 55/
60mmsmcd for FY12/FY13. We are changing our Rs/US$ assumption from 44.5/43.0 to
45/44.0 for FY12/FY13. Our FY11E EPS is up by 2% due to increase in 4Q GRM from
US$8.5/bbl to US$9.5/bbl and change in Rs/US$ rate from 44.5 to 45. Our SOTP-based
target price is Rs971. Maintain Neutral.
Company description
Reliance Industries (RIL), a Fortune-500 company, is India's
largest private sector entity, with a turnover of US$40b and
net profit of US$3.5b. It has reported historically high
CAGRs of over 22% in topline and bottomline through
backward integration in energy chain (textiles, petchem,
refining and E&P) and is now moving into high growth areas
like retail and SEZ.
Key investment arguments
E&P upside now seems back-ended: Though E&P
would be a long-term driver for the company, in the
medium term, growth seems to be subdued, led by
delays in the ramp-up of KG-D6 and delays in the
approval of development plans for satellite fields and
NEC-25. RIL is the largest exploration acreage holder
in the private sector in India. Post its world-scale gas
discovery in 2002 in KG-D6, it has reported more than
50 discoveries.
Refining - high complexity to help RIL: Uptick in GRM,
led by economic recovery and cold weather will help
RIL to post decent refinery margins in coming quarters.
We expect refining margins to remain range-bound at
US$5-6/bbl, as impending 1.4mmbbl/d of new capacity
would start supporting incremental demand.
Petrochemicals - increasing demand in India and China
helps: Growing demand in India and China has helped
petchem margins to remain robust despite new
capacities getting commissioned in the Middle East and
China. Strong domestic demand will help RIL to push
through its volumes in India.
Key investment risks
Further delays in the KG-D6 gas volume ramp-up.
Our estimates could be adversely impacted by lower
than expected refining and petchem margins.
Recent developments
RIL entered into three JVs, with three different USbased
shale gas companies: (1) with Atlas Energy (RIL
stake of 40%) to develop Marcellus shale acreage, (2)
with Pioneer Natural Resources (RIL stake of 45%) in
its Eagle Ford shale acreage, and (3) with Carizzo Oil
and Gas (RIL 60% stake) in Marcellus shale acreage.
RIL acquired 95% equity stake in Infotel, which has
Broadband Wireless Access (BWA) spectrum license
for 22 circles.
Valuation and view
Adjusted for treasury shares, RIL trades at 15x FY12E
adjusted EPS of Rs72. Our SOTP-based target price
for RIL is Rs971/share. Maintain Neutral
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