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Reliance Industries
Awaiting clarity on cash usage
We have lowered our 4QFY11 net profit estimates by 9% as refinery margins look
likely to disappoint (already reflected in the stock price, in our view). We believe
the results update is unlikely to provide clarity on use of cash, but the dividend
level could provide some clue. We maintain our Hold rating and our Rs985 TP.
We cut our 4QFY11 net profit by 9%
RIL is set to report results on 21 April 2011 and we now forecast 4QFY11 net profit at
Rs54.5bn (up 16% yoy), 9% lower than our earlier estimates. The cut is driven by the likely
lower gross refinery margin (GRM), which we now estimate at US$9.4/bbl, a premium of just
US$2.1/bbl over Singapore complex (Reuters) GRM. This would be the lowest premium in
last six years and is a result of the relatively high margins for fuel oil (which RIL does not
produce), which have boosted Singapore margins. A near eight-week shutdown of RIL’s
fluidised catalytic cracking unit (FCCU) at the old 660kbd refinery has also hurt profits.
However, this lower profit estimate is already reflected in the RIL stock price, in our view.
Clarity on use of cash awaited
Given the expected inflow of US$7.2bn from BP, RIL’s investment plans are well below its
likely cash availability. We believe that clarity on use of cash will be the most important share
price driver over next 12 months – discussed in our last note, Adjusting for Budget and BP
deal, dated 11 March 2011. The results update is unlikely to provide that clarity, in our view,
but the dividend declaration could provide some clue. RIL has historically raised its absolute
dividends marginally each year and we forecast a dividend of Rs7.5/share in line with
historical trends. This works out to a payout ratio of just 11%; a much higher figure (say 20%
and above) could signal greater management willingness to return cash to shareholders.
Maintain Hold, Rs985 TP
We maintain our FY12/13F EPS estimates for now and would look to adjust these numbers
post management inputs on likely gas production levels (current KG-D6 estimate at
60mmscmd for both years) and details on capex plans. Hence, we retain our Rs985 target
price and Hold rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries
Awaiting clarity on cash usage
We have lowered our 4QFY11 net profit estimates by 9% as refinery margins look
likely to disappoint (already reflected in the stock price, in our view). We believe
the results update is unlikely to provide clarity on use of cash, but the dividend
level could provide some clue. We maintain our Hold rating and our Rs985 TP.
We cut our 4QFY11 net profit by 9%
RIL is set to report results on 21 April 2011 and we now forecast 4QFY11 net profit at
Rs54.5bn (up 16% yoy), 9% lower than our earlier estimates. The cut is driven by the likely
lower gross refinery margin (GRM), which we now estimate at US$9.4/bbl, a premium of just
US$2.1/bbl over Singapore complex (Reuters) GRM. This would be the lowest premium in
last six years and is a result of the relatively high margins for fuel oil (which RIL does not
produce), which have boosted Singapore margins. A near eight-week shutdown of RIL’s
fluidised catalytic cracking unit (FCCU) at the old 660kbd refinery has also hurt profits.
However, this lower profit estimate is already reflected in the RIL stock price, in our view.
Clarity on use of cash awaited
Given the expected inflow of US$7.2bn from BP, RIL’s investment plans are well below its
likely cash availability. We believe that clarity on use of cash will be the most important share
price driver over next 12 months – discussed in our last note, Adjusting for Budget and BP
deal, dated 11 March 2011. The results update is unlikely to provide that clarity, in our view,
but the dividend declaration could provide some clue. RIL has historically raised its absolute
dividends marginally each year and we forecast a dividend of Rs7.5/share in line with
historical trends. This works out to a payout ratio of just 11%; a much higher figure (say 20%
and above) could signal greater management willingness to return cash to shareholders.
Maintain Hold, Rs985 TP
We maintain our FY12/13F EPS estimates for now and would look to adjust these numbers
post management inputs on likely gas production levels (current KG-D6 estimate at
60mmscmd for both years) and details on capex plans. Hence, we retain our Rs985 target
price and Hold rating.
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