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Reliance Industries (RELI.BO)
4Q Operationally Below; E&P Clarity Still Eludes
4Q EBITDA below estimates — RIL’s 4Q EBITDA came in at Rs98.4bn, below
estimates primarily due to weaker than expected refining performance, though E&P
was in line (50.4 mmscmd gas production). 4Q PAT of Rs53.8bn (+14% yoy, +5% qoq)
was, however, only marginally below mainly due to higher other income.
GRMs disappoint — RIL’s 4Q GRMs came in well below expectations at US$9.2/bbl,
with premium to S’pore margins shrinking to US$2.2/bbl (vs. $3.5/bbl in 3Q). As per
mgmt, this was mainly due to: 1) FCCU shutdown, which impacted production of higher
value products, 2) lower internal generation of fuel due to the shutdown, which
necessitated purchase of additional higher-priced LNG and 3) lower margins for
petcoke and other solid products.
Strong petchem performance led by polyester — Like 3Q, mgmt remained upbeat
on the petchem business, especially polyesters, given strong demand and lack of
capacity additions. Besides, the entire polyester chain including intermediates saw high
margins, especially since Japanese PX supplies were impacted during 4Q. RIL also
benefited from strong butadiene deltas due to reduced US production (where most
crackers have begun using gas as feedstock and cannot produce butadiene anymore).
No clarity on KG gas ramp-up — Mgmt once again did not provide any guidance for
future ramp-up. It maintained that there had been no change to reserve numbers, and
was carrying out studies in the block to work around the complex and unconventional
reservoirs. Current gas production is ~50 mmscmd.
Future strategy and other updates — Mgmt acknowledged that utilization of cash
remained a key challenge. While RIL had already decided to use a part of this for
pursuing organic growth opportunities (e.g., petchem expansions), mgmt reiterated that
a part of this would be used for inorganic opportunities as well. The company has
already received cUS$2bn as deposit from BP in 4Q, which will be treated as a current
l iability until the transaction is approved.
Reliance Industries
Company description
Reliance Industries is a conglomerate with interests in upstream oil & gas (E&P),
refining, and petrochemicals. It has commissioned a super-size refinery project
through RPL (now merged with itself) and has commenced gas production at its
large gas find in the D6 block in KG basin. RIL is foraying into organized retailing
and has plans to undertake SEZ projects over the medium to long term.
Investment strategy
We rate RIL Buy/Low Risk (1L) with a Rs1,120 target price. We expect strong
momentum across RIL’s core refining and petrochemicals businesses to continue.
Continued cotton tightness should drive margins across the polyester chain, thus
benefiting Reliance. We expect an uptick in the refining margins as well with a
stronger product demand/supply balance going forward. We believe that while
further clarity on ramp-up of KG gas could be some time away, the deal with BP
nevertheless provides a benchmark for valuing the E&P business amidst production
uncertainties. Moreover, while the deal may cap near-term upside, RIL’s 60%
remaining stake still leaves sufficient room for future gains. A ~25% premium to NAV
looks justified for the E&P business given new discoveries, access to BP’s
technology, and stakes in several prospective deepwater blocks. In addition, we
believe gas prices are set to structurally rise in India, as exemplified by higher
prices approved by the government for ONGC's production from new fields. Any
willingness on the part of the gov’t to increase KG gas price (which, along with APM
gas, is now the cheapest in the country) would be a positive surprise.
Valuation
Our Rs1,120 target price is based on an average of a sum-of-the-parts value
(Rs1,071/sh) and P/E value (Rs1,109/sh) and explicitly adds NPV of the shale gas
JVs of Rs30/sh. Our SOTP is derived by: 1) Valuing RIL's core petchem and
downstream oil business on an EV/EBITDA of 7.0x FY12E; 2) Valuing total E&P
assets including oil & gas prospects and other blocks at Rs380/sh based on 10x
FY12E EV/EBITDA; 3) Valuing investments in the organized retail business, SEZ,
etc. at Rs37/share, based on book value of investments so far; and 4) Valuing
treasury stock (post stock sale) at target price. For the P/E valuation, we ascribe a
14x FY12E multiple, in line with the market multiple. We believe ramp up of the new
refinery and KG gas production will lead to the market focusing on FY12 earnings
(which capture the impact of both), prompting us to give equal weightage to a
multiple-based methodology and a sum-of-the-parts based value while deducing our
target price.
Risks
We rate RIL Low Risk, in line with the rating suggested by our quantitative riskrating
system, as commencement of the new refinery and KG gas production limit
execution risks. Besides, with the core petrochemicals and refining businesses
gaining momentum, we believe that risks on slower KG ramp-up stand mitigated.
Downside risks that could prevent the shares from reaching our target price include:
RIL's margins are exposed to the global petrochemical and refining cycles; further
delays in the ramp-up of production of KG-D6 gas; delays in the drilling programme
and/or negative news-flow for the new blocks (D9, D3, MN-D4).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RELI.BO)
4Q Operationally Below; E&P Clarity Still Eludes
4Q EBITDA below estimates — RIL’s 4Q EBITDA came in at Rs98.4bn, below
estimates primarily due to weaker than expected refining performance, though E&P
was in line (50.4 mmscmd gas production). 4Q PAT of Rs53.8bn (+14% yoy, +5% qoq)
was, however, only marginally below mainly due to higher other income.
GRMs disappoint — RIL’s 4Q GRMs came in well below expectations at US$9.2/bbl,
with premium to S’pore margins shrinking to US$2.2/bbl (vs. $3.5/bbl in 3Q). As per
mgmt, this was mainly due to: 1) FCCU shutdown, which impacted production of higher
value products, 2) lower internal generation of fuel due to the shutdown, which
necessitated purchase of additional higher-priced LNG and 3) lower margins for
petcoke and other solid products.
Strong petchem performance led by polyester — Like 3Q, mgmt remained upbeat
on the petchem business, especially polyesters, given strong demand and lack of
capacity additions. Besides, the entire polyester chain including intermediates saw high
margins, especially since Japanese PX supplies were impacted during 4Q. RIL also
benefited from strong butadiene deltas due to reduced US production (where most
crackers have begun using gas as feedstock and cannot produce butadiene anymore).
No clarity on KG gas ramp-up — Mgmt once again did not provide any guidance for
future ramp-up. It maintained that there had been no change to reserve numbers, and
was carrying out studies in the block to work around the complex and unconventional
reservoirs. Current gas production is ~50 mmscmd.
Future strategy and other updates — Mgmt acknowledged that utilization of cash
remained a key challenge. While RIL had already decided to use a part of this for
pursuing organic growth opportunities (e.g., petchem expansions), mgmt reiterated that
a part of this would be used for inorganic opportunities as well. The company has
already received cUS$2bn as deposit from BP in 4Q, which will be treated as a current
l iability until the transaction is approved.
Reliance Industries
Company description
Reliance Industries is a conglomerate with interests in upstream oil & gas (E&P),
refining, and petrochemicals. It has commissioned a super-size refinery project
through RPL (now merged with itself) and has commenced gas production at its
large gas find in the D6 block in KG basin. RIL is foraying into organized retailing
and has plans to undertake SEZ projects over the medium to long term.
Investment strategy
We rate RIL Buy/Low Risk (1L) with a Rs1,120 target price. We expect strong
momentum across RIL’s core refining and petrochemicals businesses to continue.
Continued cotton tightness should drive margins across the polyester chain, thus
benefiting Reliance. We expect an uptick in the refining margins as well with a
stronger product demand/supply balance going forward. We believe that while
further clarity on ramp-up of KG gas could be some time away, the deal with BP
nevertheless provides a benchmark for valuing the E&P business amidst production
uncertainties. Moreover, while the deal may cap near-term upside, RIL’s 60%
remaining stake still leaves sufficient room for future gains. A ~25% premium to NAV
looks justified for the E&P business given new discoveries, access to BP’s
technology, and stakes in several prospective deepwater blocks. In addition, we
believe gas prices are set to structurally rise in India, as exemplified by higher
prices approved by the government for ONGC's production from new fields. Any
willingness on the part of the gov’t to increase KG gas price (which, along with APM
gas, is now the cheapest in the country) would be a positive surprise.
Valuation
Our Rs1,120 target price is based on an average of a sum-of-the-parts value
(Rs1,071/sh) and P/E value (Rs1,109/sh) and explicitly adds NPV of the shale gas
JVs of Rs30/sh. Our SOTP is derived by: 1) Valuing RIL's core petchem and
downstream oil business on an EV/EBITDA of 7.0x FY12E; 2) Valuing total E&P
assets including oil & gas prospects and other blocks at Rs380/sh based on 10x
FY12E EV/EBITDA; 3) Valuing investments in the organized retail business, SEZ,
etc. at Rs37/share, based on book value of investments so far; and 4) Valuing
treasury stock (post stock sale) at target price. For the P/E valuation, we ascribe a
14x FY12E multiple, in line with the market multiple. We believe ramp up of the new
refinery and KG gas production will lead to the market focusing on FY12 earnings
(which capture the impact of both), prompting us to give equal weightage to a
multiple-based methodology and a sum-of-the-parts based value while deducing our
target price.
Risks
We rate RIL Low Risk, in line with the rating suggested by our quantitative riskrating
system, as commencement of the new refinery and KG gas production limit
execution risks. Besides, with the core petrochemicals and refining businesses
gaining momentum, we believe that risks on slower KG ramp-up stand mitigated.
Downside risks that could prevent the shares from reaching our target price include:
RIL's margins are exposed to the global petrochemical and refining cycles; further
delays in the ramp-up of production of KG-D6 gas; delays in the drilling programme
and/or negative news-flow for the new blocks (D9, D3, MN-D4).
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