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Reliance Industries
Refining zooms, Polyester booms
Event
RIL reported a PAT of Rs51.4bn, a growth of 28% YoY and 4%QoQ, in line
with expectations. This is due to rising GRMs and a very strong bounce for
Polyester margins, which have more than offset volume curtailments at KGD6
and the domestic-focussed refinery. With its primary businesses doing very
well, we believe that RIL is best positioned to take advantage of the cyclical
recovery currently in progress and maintain Outperform with a TP of Rs1,245.
Impact
Refined gains. RIL’s GRMs rose from US$ 7.9/bbl in 2QFY11 to US$9.0/bbl
in 3QFY11, and continued their QoQ rise, signalling a clear recovery. GRM
improvement was a result of US$ 0.3/bbl QoQ rise in light-heavy crude price
differentials (Fig 8), as well as high middle distillate cracks of ~US$14/bbl. A 3
week shutdown of half of its 660kbpd domestic-focussed older refinery (for
CDU/coker maintenance) curtailed its output to 16.1MMT, a QoQ utilization
drop of 5%. A 3-4 week shutdown of its 200kbpd FCC and 160kbpd VGO
units is planned for 4Q, which could potentially reduce throughput by 3-4%.
KGD6 output fell 6% QoQ, but PMT is back to normal production: A
reduction in KGD6 output due to reservoir issues, dragged down average gas
production to 54.5mmscmd. However, the return of Panna-Mukta fields to
normal production partially offset the same; resulting in upstream EBIT falling
by ~11%, and its contribution to overall EBIT reducing to 24% (28% in 2Q).
Management maintains that it is in process of resolving both technical as well
as regulatory issues for its upstream blocks, including KG-D6.
Polyester chain margins at decade highs; expected to improve further.
Due to cotton prices having increased dramatically, almost 120% YoY by
December 2010, replacement demand for polyester fibreas/yarn has been
extremely strong. Global polyester demand is expected to grow at 7%+, while
capacity additions in CY11 are ~5%, leading to a bullish outlook on margins.
Polymer margins were mixed, but are supported by demand which continues
to surprise (especially in Asia, due to India-China demand growth).
Earnings and target price revision
Reducing FY11 PAT estimates by 2.5% due to shutdown in refinery, KGD6.
Price catalyst
12-month price target: Rs1,245.00 based on a Sum of Parts methodology.
Catalyst: Clarity on ramp-up of KGD6.
Action and recommendation
RIL our top regional pick: In our recent report on the Asian refining sector
(http://macq.wir.jp/e.ut?e=9LmFz344yvXhgmbBhCgvzKnqq3ZS), RIL was
rated the top pick because of its high complexity, nil fuel oil output, operational
efficiency (attested to by reputed industry consultants) and that it is playing
catch-up with Thai/Korean pure-play peers. Despite concerns at KGD6, RIL
has a good portfolio of growth-options in our view, with shale gas production
(Marcellus/Eagle Ford), and polyester expansion/gas cracker on schedule.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries
Refining zooms, Polyester booms
Event
RIL reported a PAT of Rs51.4bn, a growth of 28% YoY and 4%QoQ, in line
with expectations. This is due to rising GRMs and a very strong bounce for
Polyester margins, which have more than offset volume curtailments at KGD6
and the domestic-focussed refinery. With its primary businesses doing very
well, we believe that RIL is best positioned to take advantage of the cyclical
recovery currently in progress and maintain Outperform with a TP of Rs1,245.
Impact
Refined gains. RIL’s GRMs rose from US$ 7.9/bbl in 2QFY11 to US$9.0/bbl
in 3QFY11, and continued their QoQ rise, signalling a clear recovery. GRM
improvement was a result of US$ 0.3/bbl QoQ rise in light-heavy crude price
differentials (Fig 8), as well as high middle distillate cracks of ~US$14/bbl. A 3
week shutdown of half of its 660kbpd domestic-focussed older refinery (for
CDU/coker maintenance) curtailed its output to 16.1MMT, a QoQ utilization
drop of 5%. A 3-4 week shutdown of its 200kbpd FCC and 160kbpd VGO
units is planned for 4Q, which could potentially reduce throughput by 3-4%.
reduction in KGD6 output due to reservoir issues, dragged down average gas
production to 54.5mmscmd. However, the return of Panna-Mukta fields to
normal production partially offset the same; resulting in upstream EBIT falling
by ~11%, and its contribution to overall EBIT reducing to 24% (28% in 2Q).
Management maintains that it is in process of resolving both technical as well
as regulatory issues for its upstream blocks, including KG-D6.
Polyester chain margins at decade highs; expected to improve further.
Due to cotton prices having increased dramatically, almost 120% YoY by
December 2010, replacement demand for polyester fibreas/yarn has been
extremely strong. Global polyester demand is expected to grow at 7%+, while
capacity additions in CY11 are ~5%, leading to a bullish outlook on margins.
Polymer margins were mixed, but are supported by demand which continues
to surprise (especially in Asia, due to India-China demand growth).
Earnings and target price revision
Reducing FY11 PAT estimates by 2.5% due to shutdown in refinery, KGD6.
Price catalyst
12-month price target: Rs1,245.00 based on a Sum of Parts methodology.
Catalyst: Clarity on ramp-up of KGD6.
Action and recommendation
RIL our top regional pick: In our recent report on the Asian refining sector
(http://macq.wir.jp/e.ut?e=9LmFz344yvXhgmbBhCgvzKnqq3ZS), RIL was
rated the top pick because of its high complexity, nil fuel oil output, operational
efficiency (attested to by reputed industry consultants) and that it is playing
catch-up with Thai/Korean pure-play peers. Despite concerns at KGD6, RIL
has a good portfolio of growth-options in our view, with shale gas production
(Marcellus/Eagle Ford), and polyester expansion/gas cracker on schedule.
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