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Reliance Industries
4QFY11 results: tad lower
4QFY11 net profit was just 2% below our estimate mainly on lower GRMs. As
expected, management did not provide any guidance on gas production or use of
cash, though it did admit that finding suitable projects would be a key challenge.
No major changes to our estimates. Our target price remains Rs985; Hold.
Profits marginally lower
RIL reported a 4QFY11 standalone net profit of Rs53.8bn (up 14.1% yoy) and just 2% below
our estimates. On a consolidated basis, FY11 net profit was 5% lower than standalone due
to a loss of Rs4bn mainly on retail operations and a write-off of Rs9.2bn on unsuccessful
overseas exploration efforts. End-FY11 standalone net debt at Rs250bn was down sharply
by Rs134bn qoq mainly due to receipt of advance payment of Rs90bn (US$2bn) by BP.
However, consolidated net debt was much higher at Rs370bn as additional debt was raised
by subsidiaries that are investing in telecom and shale gas.
Segment-wise analysis
No guidance was provided on KG-D6 gas production and we have cut our forecast for FY12
to 55mscmd (currently 50mmscmd) but maintain our 60mmscmd estimate for FY13. 4QFY11
refinery GRM was reported at US$9.2/bbl, a premium of just US$1.9/bbl over Singapore
complex (Reuters) GRM, the lowest in the last six years. In petrochemicals, the company is
going ahead with its planned investments in polyester and polyester intermediates (US$3bn
capex), but the balance investments in the new cracker and petcoke regassification
(US$7bn) are still pending announcement of the final investment decision.
Maintain Hold, Rs985 TP
We are largely maintaining our FY12/13F earnings forecasts (change of less than 1%), our
Rs985TP and our Hold rating. We believe RIL needs to provide further clarity on sufficiently
large new projects that can provide adequate growth prospects. Returning cash to
shareholders does not seem to be on the agenda currently. The FY11 dividend has been
declared at Rs8/share, which leads to just a 12% payout.
4QFY11 results: tad lower
RIL results do not provide any positive catalysts for share price outperformance. Going
forward, the key stock price driver is likely to be decisions on use of cash, in our view.
Market is likely to take a more positive view on capex, if it is in the core businesses.
Profits marginally lower
RIL reported 4QFY11 standalone net profit of Rs53.8bn (up 14.1% yoy) and just 2% below our
estimates. Consolidated results are declared only at year end and the FY11 consolidated net
profit was 5% lower than standalone. The segment-wise results showed that the “others” segment
had a Rs4.6bn loss at the EBIT level that related mainly to the subsidiaries operating in the
organised retail business. There was also an exceptional item (loss of Rs9.2bn) that related to
write-off of expenses incurred in the overseas blocks in Oman and East Timor, as the prospects of
these blocks have not been encouraging.
RIL implemented a demerger scheme in FY06, whereby the operations relating to financial
services, power and telecom were separated. There have been certain claims relating to the
above demerger/demerged undertakings that have been settled by the company during the year
and an additional Rs7bn has been appropriated against revaluation reserve.
On 21 February 2011, RIL announced that BP would be taking a 30% stake in 23 blocks for
US$7.2bn. Pursuant to this deal, RIL has already received US$2bn (Rs90bn) as a deposit, which
has been shown under current liabilities. This inflow has resulted in end-FY11 standalone net debt
dropping sharply by Rs134bn qoq to Rs250bn. However, on a consolidated basis, net debt was
much higher at Rs370bn as additional debt was raised by subsidiaries on their balance sheet for
new investments in shale gas and telecom.
Segment-wise analysis
E&P
4QFY11 segment EBIT at Rs15.7bn was above our expectations as the sale of oil from KG-D6
block was higher than expectations. Management refused to provide any guidance on KG-D6 gas
production as discussions with the Indian government (GOI) are ongoing. We have cut our FY12
estimate to 55mmscmd from 60mmscmd (current production 50mmscmd) but maintain our FY13
estimate at 60mmscmd. In the absence of any management guidance, there is very little clarity
currently on likely production levels. In our view, production cannot rise unless more wells are
drilled and this would involve more capex. News reports seem to indicate there is disagreement
between RIL and the regulator (DGH) on how these plans are to be implemented and production
could rise only after both parties arrive at some amicable solution. RIL reiterated that the reserve
figures for KG-D6 had not changed despite the setbacks on production.
FY11 exploration performance of RIL in domestic operations appeared disappointing. A total of 19
exploratory/appraisal wells were drilled during the year resulting in a total of seven discoveries.
(One being announced at the analyst meet itself.) But five discoveries related to just one block,
indicating that wells drilled in nearly seven other blocks proved dry. As mentioned above, even the
overseas exploration spending has not been successful.
On shale gas, RIL has invested US$1.77bn year to date in its four joint ventures in the US with
another US$3.5bn capex commitment over next two years.
R&M
4QFY11 segment EBIT at Rs25.1bn was below expectations due to lower gross refinery margins.
RIL reported a GRM of US$9.2/bbl compared with our expectations of US$9.4/bbl and the
premium over Singapore margins was one of the lowest in the last six years. Looking at historical
trends, closest resemblance of product-wise margins in 4QFY11 was in 3QFY08, when RIL had
reported much higher GRM of US$15.4/bbl for its older refinery. The comparatively poorer GRM
this time was mainly attributed to the FCC shutdown in the older refinery for 46 days (the new
refinery operated smoothly).
We have forecast a GRM of US$10.3/bbl in FY12 and FY13.
Petrochemicals
4QFY11 segment EBIT at Rs26.3bn was below expectations due to lower production. Margins
remained strong across polyester, polyester intermediates and propylene chain, but were weak for
polyethylene. RIL has announced commencement of its expansion plans in polyester and
polyester intermediates, though capex on these projects (US$2.5bn-3bn) is yet to begin. RIL
intends to spend an additional US$7bn on a new cracker and a petcoke regassification plant but
the zero date for these projects (final investment decision) is yet to be announced.
Maintain Hold, Rs985 TP
We are largely maintaining our FY12/13F earnings forecasts (change of less than 1%), our Rs985
TP and our Hold rating. In our view, RIL needs to provide further clarity on sufficiently large new
projects which can provide adequate growth opportunities. Management has admitted that use of
cash is still a challenge. Returning cash to shareholders does not seem to be on the agenda
currently. The FY11 dividend has been declared at Rs8/share (up from Rs7/share in FY10) which
leads to just a 12% payout of profits.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries
4QFY11 results: tad lower
4QFY11 net profit was just 2% below our estimate mainly on lower GRMs. As
expected, management did not provide any guidance on gas production or use of
cash, though it did admit that finding suitable projects would be a key challenge.
No major changes to our estimates. Our target price remains Rs985; Hold.
Profits marginally lower
our estimates. On a consolidated basis, FY11 net profit was 5% lower than standalone due
to a loss of Rs4bn mainly on retail operations and a write-off of Rs9.2bn on unsuccessful
overseas exploration efforts. End-FY11 standalone net debt at Rs250bn was down sharply
by Rs134bn qoq mainly due to receipt of advance payment of Rs90bn (US$2bn) by BP.
However, consolidated net debt was much higher at Rs370bn as additional debt was raised
by subsidiaries that are investing in telecom and shale gas.
Segment-wise analysis
No guidance was provided on KG-D6 gas production and we have cut our forecast for FY12
to 55mscmd (currently 50mmscmd) but maintain our 60mmscmd estimate for FY13. 4QFY11
refinery GRM was reported at US$9.2/bbl, a premium of just US$1.9/bbl over Singapore
complex (Reuters) GRM, the lowest in the last six years. In petrochemicals, the company is
going ahead with its planned investments in polyester and polyester intermediates (US$3bn
capex), but the balance investments in the new cracker and petcoke regassification
(US$7bn) are still pending announcement of the final investment decision.
Maintain Hold, Rs985 TP
We are largely maintaining our FY12/13F earnings forecasts (change of less than 1%), our
Rs985TP and our Hold rating. We believe RIL needs to provide further clarity on sufficiently
large new projects that can provide adequate growth prospects. Returning cash to
shareholders does not seem to be on the agenda currently. The FY11 dividend has been
declared at Rs8/share, which leads to just a 12% payout.
4QFY11 results: tad lower
RIL results do not provide any positive catalysts for share price outperformance. Going
forward, the key stock price driver is likely to be decisions on use of cash, in our view.
Market is likely to take a more positive view on capex, if it is in the core businesses.
Profits marginally lower
RIL reported 4QFY11 standalone net profit of Rs53.8bn (up 14.1% yoy) and just 2% below our
estimates. Consolidated results are declared only at year end and the FY11 consolidated net
profit was 5% lower than standalone. The segment-wise results showed that the “others” segment
had a Rs4.6bn loss at the EBIT level that related mainly to the subsidiaries operating in the
organised retail business. There was also an exceptional item (loss of Rs9.2bn) that related to
write-off of expenses incurred in the overseas blocks in Oman and East Timor, as the prospects of
these blocks have not been encouraging.
RIL implemented a demerger scheme in FY06, whereby the operations relating to financial
services, power and telecom were separated. There have been certain claims relating to the
above demerger/demerged undertakings that have been settled by the company during the year
and an additional Rs7bn has been appropriated against revaluation reserve.
On 21 February 2011, RIL announced that BP would be taking a 30% stake in 23 blocks for
US$7.2bn. Pursuant to this deal, RIL has already received US$2bn (Rs90bn) as a deposit, which
has been shown under current liabilities. This inflow has resulted in end-FY11 standalone net debt
dropping sharply by Rs134bn qoq to Rs250bn. However, on a consolidated basis, net debt was
much higher at Rs370bn as additional debt was raised by subsidiaries on their balance sheet for
new investments in shale gas and telecom.
Segment-wise analysis
E&P
4QFY11 segment EBIT at Rs15.7bn was above our expectations as the sale of oil from KG-D6
block was higher than expectations. Management refused to provide any guidance on KG-D6 gas
production as discussions with the Indian government (GOI) are ongoing. We have cut our FY12
estimate to 55mmscmd from 60mmscmd (current production 50mmscmd) but maintain our FY13
estimate at 60mmscmd. In the absence of any management guidance, there is very little clarity
currently on likely production levels. In our view, production cannot rise unless more wells are
drilled and this would involve more capex. News reports seem to indicate there is disagreement
between RIL and the regulator (DGH) on how these plans are to be implemented and production
could rise only after both parties arrive at some amicable solution. RIL reiterated that the reserve
figures for KG-D6 had not changed despite the setbacks on production.
FY11 exploration performance of RIL in domestic operations appeared disappointing. A total of 19
exploratory/appraisal wells were drilled during the year resulting in a total of seven discoveries.
(One being announced at the analyst meet itself.) But five discoveries related to just one block,
indicating that wells drilled in nearly seven other blocks proved dry. As mentioned above, even the
overseas exploration spending has not been successful.
On shale gas, RIL has invested US$1.77bn year to date in its four joint ventures in the US with
another US$3.5bn capex commitment over next two years.
R&M
4QFY11 segment EBIT at Rs25.1bn was below expectations due to lower gross refinery margins.
RIL reported a GRM of US$9.2/bbl compared with our expectations of US$9.4/bbl and the
premium over Singapore margins was one of the lowest in the last six years. Looking at historical
trends, closest resemblance of product-wise margins in 4QFY11 was in 3QFY08, when RIL had
reported much higher GRM of US$15.4/bbl for its older refinery. The comparatively poorer GRM
this time was mainly attributed to the FCC shutdown in the older refinery for 46 days (the new
refinery operated smoothly).
We have forecast a GRM of US$10.3/bbl in FY12 and FY13.
Petrochemicals
4QFY11 segment EBIT at Rs26.3bn was below expectations due to lower production. Margins
remained strong across polyester, polyester intermediates and propylene chain, but were weak for
polyethylene. RIL has announced commencement of its expansion plans in polyester and
polyester intermediates, though capex on these projects (US$2.5bn-3bn) is yet to begin. RIL
intends to spend an additional US$7bn on a new cracker and a petcoke regassification plant but
the zero date for these projects (final investment decision) is yet to be announced.
Maintain Hold, Rs985 TP
We are largely maintaining our FY12/13F earnings forecasts (change of less than 1%), our Rs985
TP and our Hold rating. In our view, RIL needs to provide further clarity on sufficiently large new
projects which can provide adequate growth opportunities. Management has admitted that use of
cash is still a challenge. Returning cash to shareholders does not seem to be on the agenda
currently. The FY11 dividend has been declared at Rs8/share (up from Rs7/share in FY10) which
leads to just a 12% payout of profits.
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