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Reliance Industries: Refining, petchem outperforms; E&P
disappoints
Improvement in RIL’s gross refining margins (GRMs) to
US$9.0/bbl in Q3 from US$7.9/bbl in Q2, coupled with
robust performance of the petchem segment led to superior
performance on a sequential basis. However, the E&P
segment disappointed with KG-D6 average gas production
declining to 54.5mmscmd and crude production averaging
19,400bpd.
Revenue growth led by higher realizations: Q3 revenue
grew 5.2% YoY to Rs597.9bn, primarily driven by higher
realisations as crude inched up leading to higher product
prices.
Strong refining, petchem lead to EBITDA expansion:
Operating margin expanded 220bp YoY to 16.0% vs 13.8% in
Q3FY10 owing to strong performance by both refining and
petchem segments. Strong operating performance led to
21.7% YoY jump in operating profit to Rs95.4bn from
Rs78.4bn in Q3FY10.
PAT soars by over 28.1%: DDA surged 20.2%YoY to
Rs33.6bn in Q3FY11 from Rs27.8bn in Q3FY10, primarily led
by E&P. Other income jumped by over 45.9% YoY to Rs7.4bn
(Rs5.1bn) due to higher income from investments. PAT
soared 28.1% YoY to Rs51.4bn (Rs40.1bn).
E&P to underperform in the near future: Refining and
petchem are expected to spur RIL’s performance in the near
term. However, E&P is likely to be a dampener in the period
with KG-D6 production stagnating at about 52–55mmscmd
and oil production at bout 18-20,000bpd. RIL along with the
DGH is currently assessing the technical aspects of RIL’s E&P
assets. There is no indication on the timeline for this
assessment and till clarity emerges the E&P segment is likely
to underperform. We believe the key growth driver for RIL, its
E&P segment, is likely to dampen valuations for the company
in near term. Hence, we downgrade the stock from Buy to
Hold. Potential triggers in the near-term could be news flow
from discoveries, shaping up of shale gas initiative and strong
refining and petchem margins.
Q3FY11 results – Key takeaways
GRMs improve, outlook for 2011 promising
RIL reported GRMs of US$9.0/bbl vs US$7.9/bbl in Q2FY11 and US$5.9/bbl in Q3FY10. The
strong improvement in GRMs was due to higher jet kerosene cracks following a rise in air traffic
and the demand for middle distillates was buoyed by economic recovery across the developed
countries and cold weather. Gasoline cracks also remained strong due to higher demand from
the US coupled with diminishing inventories. Crude consumption is likely to remain buoyant in
2011 (IEA expects 2.5mbpd rise in demand in 2010) keeping GRMs firm. However, if the crude
rises further and crosses the three-digit level then it could put pressure on GRMs.
With strong GRMs, performance of the refining segment was astounding with refining EBIT
improving from Rs21.9bn in Q2FY11 to Rs24.4bn in Q3FY11 and Rs13.8bn in Q3FY10. Refinery
utilisation during the quarter was marginally lower at 104% as there was a planned shutdown
of a crude distillation unit for 22days. Thus crude processing during Q3FY11 was 16.1mmt
against 16.6mmt in Q3FY10 and 16.9mmt in Q2FY11.
Domestic petchem segment continues to remain strong
The demand for domestic polymers grew by about 11% YoY 9MFY11. RIL’s capacity utilisation
during the period was almost 100%. Overall production of polymers during 9MFY11 stood at
3.1mmt and RIL maintained its domestic market share at about 46%. Higher feedstock costs
(naphtha, crude oil) led to cost pressure, however due to strong demand product prices also
strengthened, maintaining margins.
Asian operating rates went up to 87% while global rate was 85%. US also witnessed higher
operating rate in excess of about 90% owing to availability of natural gas and ethane and thus
benefiting polymer exports.
Polymer outlook is positive on the back of lower availability of feedstock (natural gas) for the
newer Middle-East capacities which is expected to keep the prices firm. Moreover, no new
capacity additions in the medium term would lead to demand-supply mismatch in the next
couple of years.
Polyester and intermediates continued their strong journey with buoyant prices and robust
demand. Domestic polyester demand grew impressively at over 15% YoY during 9MFY11.
Polyester prices went up by over 30-50% and polyester intermediate prices moved up by over
25% sequentially thus providing a fillip to the petchem segment’s performance.
Polyester outlook is upbeat owing to strong global demand which is expected to go up by over
7% YoY incrementally while the capacity addition lags behind at about 5%. Also, strong cotton
prices and tight availability will lead to robust polyester demand and healthy prices.
Strong performance of both the polymers and polyester led to sequential EBIT margin
expansion in petchem from 14.6% to 15.2% in Q3FY11. Petchem EBIT thus improved from
Rs22.0bn in Q2FY11 to Rs24.3bn in Q3FY11 (Q3FY10-Rs20.6bn).
Disappointing performance from KG D6
Average KG D6 natural gas production during Q3FY11 dropped to 54.5mmscmd from
57.9mmscmd in Q2FY11. Technical glitches led to the fall in production from the field.
Panna Mukta volumes which were hampered during Q2FY11 were restored by end-October
thus improving performance. Even though the PMT production was restored during the
quarter, lower KG D6 production led to sequential decline in E&P EBIT from Rs17.1bn in Q2FY11
to Rs15.0bn in Q3FY11 (Q2FY10-Rs14.8bn).
Current KG D6 gas production is about 52-55mmscmd and crude production about 17,000bpd.
The fall in production is due to technical issues like reservoir pressure etc. Currently, the
company is discussing these issues with the DGH and could not provide any clarity. However, in
the near term there is no possibility of increase in oil or gas production.
Downgrade to Hold with target price of Rs1,075
GRMs environment is likely to remain strong in the medium term and is likely to benefit RIL
which is operating at about 1.2mbpd capacity. Widening of light-heavy and sweet-sour
differentials is expected to support the complex refining margins. Reduced cotton production
and increasing demand has led to strong performance by the polyester and polyester
intermediates. The outlook remains strong with better performance expected in Q4FY11 and in
2011. Polymer demand across the Asian region is strong and is picking up in developed
countries. Hence the prices and margins are expected to remain healthy in the near term.
RIL’s E&P segment is likely to be the dampener in the near term as production issues have been
haunting KG D6 and assessment of all the blocks is currently under way with DGH. The
company has not provided any indication on when the KG D6 production will reach
60mmscmd (80mmscmd is much farther away). However it seems production will remain
stagnant at about 55mmscmd in the near term. Crude production is also likely to remain weak
in the near term.
We believe that legacy businesses (refining and petchem) will perform better in the near term,
but the E&P segment will underperform in the near to medium term which is likely to take a toll
on RIL’s overall performance and valuations. Considering the recent development in E&P, we
have revised our estimates for FY12E and FY13E. We do not believe that the KG D6 plateau
production will happen in FY12E but only by the end of FY13. Accordingly our DCF valuation for
KG D6 has been revised downwards by about Rs18/share. We believe the key growth driver for
RIL in the near term, the KG D6, is likely to be a dampener. Hence, we downgrade the stock from Buy
to Hold. However, potential triggers in the near term could be news of discoveries, the shaping up of
shale gas initiative and strong refining and petchem margins.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries: Refining, petchem outperforms; E&P
disappoints
Improvement in RIL’s gross refining margins (GRMs) to
US$9.0/bbl in Q3 from US$7.9/bbl in Q2, coupled with
robust performance of the petchem segment led to superior
performance on a sequential basis. However, the E&P
segment disappointed with KG-D6 average gas production
declining to 54.5mmscmd and crude production averaging
19,400bpd.
Revenue growth led by higher realizations: Q3 revenue
grew 5.2% YoY to Rs597.9bn, primarily driven by higher
realisations as crude inched up leading to higher product
prices.
Strong refining, petchem lead to EBITDA expansion:
Operating margin expanded 220bp YoY to 16.0% vs 13.8% in
Q3FY10 owing to strong performance by both refining and
petchem segments. Strong operating performance led to
21.7% YoY jump in operating profit to Rs95.4bn from
Rs78.4bn in Q3FY10.
PAT soars by over 28.1%: DDA surged 20.2%YoY to
Rs33.6bn in Q3FY11 from Rs27.8bn in Q3FY10, primarily led
by E&P. Other income jumped by over 45.9% YoY to Rs7.4bn
(Rs5.1bn) due to higher income from investments. PAT
soared 28.1% YoY to Rs51.4bn (Rs40.1bn).
E&P to underperform in the near future: Refining and
petchem are expected to spur RIL’s performance in the near
term. However, E&P is likely to be a dampener in the period
with KG-D6 production stagnating at about 52–55mmscmd
and oil production at bout 18-20,000bpd. RIL along with the
DGH is currently assessing the technical aspects of RIL’s E&P
assets. There is no indication on the timeline for this
assessment and till clarity emerges the E&P segment is likely
to underperform. We believe the key growth driver for RIL, its
E&P segment, is likely to dampen valuations for the company
in near term. Hence, we downgrade the stock from Buy to
Hold. Potential triggers in the near-term could be news flow
from discoveries, shaping up of shale gas initiative and strong
refining and petchem margins.
Q3FY11 results – Key takeaways
GRMs improve, outlook for 2011 promising
RIL reported GRMs of US$9.0/bbl vs US$7.9/bbl in Q2FY11 and US$5.9/bbl in Q3FY10. The
strong improvement in GRMs was due to higher jet kerosene cracks following a rise in air traffic
and the demand for middle distillates was buoyed by economic recovery across the developed
countries and cold weather. Gasoline cracks also remained strong due to higher demand from
the US coupled with diminishing inventories. Crude consumption is likely to remain buoyant in
2011 (IEA expects 2.5mbpd rise in demand in 2010) keeping GRMs firm. However, if the crude
rises further and crosses the three-digit level then it could put pressure on GRMs.
With strong GRMs, performance of the refining segment was astounding with refining EBIT
improving from Rs21.9bn in Q2FY11 to Rs24.4bn in Q3FY11 and Rs13.8bn in Q3FY10. Refinery
utilisation during the quarter was marginally lower at 104% as there was a planned shutdown
of a crude distillation unit for 22days. Thus crude processing during Q3FY11 was 16.1mmt
against 16.6mmt in Q3FY10 and 16.9mmt in Q2FY11.
Domestic petchem segment continues to remain strong
The demand for domestic polymers grew by about 11% YoY 9MFY11. RIL’s capacity utilisation
during the period was almost 100%. Overall production of polymers during 9MFY11 stood at
3.1mmt and RIL maintained its domestic market share at about 46%. Higher feedstock costs
(naphtha, crude oil) led to cost pressure, however due to strong demand product prices also
strengthened, maintaining margins.
Asian operating rates went up to 87% while global rate was 85%. US also witnessed higher
operating rate in excess of about 90% owing to availability of natural gas and ethane and thus
benefiting polymer exports.
Polymer outlook is positive on the back of lower availability of feedstock (natural gas) for the
newer Middle-East capacities which is expected to keep the prices firm. Moreover, no new
capacity additions in the medium term would lead to demand-supply mismatch in the next
couple of years.
Polyester and intermediates continued their strong journey with buoyant prices and robust
demand. Domestic polyester demand grew impressively at over 15% YoY during 9MFY11.
Polyester prices went up by over 30-50% and polyester intermediate prices moved up by over
25% sequentially thus providing a fillip to the petchem segment’s performance.
Polyester outlook is upbeat owing to strong global demand which is expected to go up by over
7% YoY incrementally while the capacity addition lags behind at about 5%. Also, strong cotton
prices and tight availability will lead to robust polyester demand and healthy prices.
Strong performance of both the polymers and polyester led to sequential EBIT margin
expansion in petchem from 14.6% to 15.2% in Q3FY11. Petchem EBIT thus improved from
Rs22.0bn in Q2FY11 to Rs24.3bn in Q3FY11 (Q3FY10-Rs20.6bn).
Disappointing performance from KG D6
Average KG D6 natural gas production during Q3FY11 dropped to 54.5mmscmd from
57.9mmscmd in Q2FY11. Technical glitches led to the fall in production from the field.
Panna Mukta volumes which were hampered during Q2FY11 were restored by end-October
thus improving performance. Even though the PMT production was restored during the
quarter, lower KG D6 production led to sequential decline in E&P EBIT from Rs17.1bn in Q2FY11
to Rs15.0bn in Q3FY11 (Q2FY10-Rs14.8bn).
Current KG D6 gas production is about 52-55mmscmd and crude production about 17,000bpd.
The fall in production is due to technical issues like reservoir pressure etc. Currently, the
company is discussing these issues with the DGH and could not provide any clarity. However, in
the near term there is no possibility of increase in oil or gas production.
Downgrade to Hold with target price of Rs1,075
GRMs environment is likely to remain strong in the medium term and is likely to benefit RIL
which is operating at about 1.2mbpd capacity. Widening of light-heavy and sweet-sour
differentials is expected to support the complex refining margins. Reduced cotton production
and increasing demand has led to strong performance by the polyester and polyester
intermediates. The outlook remains strong with better performance expected in Q4FY11 and in
2011. Polymer demand across the Asian region is strong and is picking up in developed
countries. Hence the prices and margins are expected to remain healthy in the near term.
RIL’s E&P segment is likely to be the dampener in the near term as production issues have been
haunting KG D6 and assessment of all the blocks is currently under way with DGH. The
company has not provided any indication on when the KG D6 production will reach
60mmscmd (80mmscmd is much farther away). However it seems production will remain
stagnant at about 55mmscmd in the near term. Crude production is also likely to remain weak
in the near term.
We believe that legacy businesses (refining and petchem) will perform better in the near term,
but the E&P segment will underperform in the near to medium term which is likely to take a toll
on RIL’s overall performance and valuations. Considering the recent development in E&P, we
have revised our estimates for FY12E and FY13E. We do not believe that the KG D6 plateau
production will happen in FY12E but only by the end of FY13. Accordingly our DCF valuation for
KG D6 has been revised downwards by about Rs18/share. We believe the key growth driver for
RIL in the near term, the KG D6, is likely to be a dampener. Hence, we downgrade the stock from Buy
to Hold. However, potential triggers in the near term could be news of discoveries, the shaping up of
shale gas initiative and strong refining and petchem margins.
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