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For 4QFY2011, RIL reported 14.1% yoy growth in its bottom line due to higher
refining and petrochemical margins. On a qoq basis, PAT growth was restricted
to 4.7% because of the dip in production from KG-D6 field. Overall, numbers
were below our expectations on the top-line and bottom-line fronts on account of
lower-than-expected refining margins (due to the impact of FCCU shutdown) and
output from KG-D6 field. We maintain Buy on the stock.
Earnings post sequential as well as yoy growth: RIL’s top line increased by 26.2%
yoy to `72,674cr (`57,570cr), primarily on the back of 22.3% yoy growth in
refining revenue to `62,704cr (`51,250cr) and a 17.8% yoy increase in
petrochemical revenue to `18,194cr (`15,448cr). Growth in the refining and
petrochemical segments was due to higher product prices. Crude oil processed
during the quarter was flat at 16.7mn tonnes. KG-D6 gas production declined
sequentially, with average production at 51mmscmd (54.5mmscmd). Operating
profit grew by 7.7% yoy to `9,843cr (`9,136cr), which was below our estimate
due to lower-than-expected refining margins.
Outlook and valuation: RIL’s extant businesses (refining and petrochemical) have
been doing quite well and we expect the company to report higher refining
margins in the coming quarters as FCCU of DTA Refinery has started. On the
petrochemical side, we do not expect margins to fall below the current level.
However, there are some concerns on the KG basin gas output. Nevertheless, we
believe RIL’s deal with BP deal is a positive one, as the combined expertise of both
the parties will result in optimisation of producing blocks and enhancement of
resources in exploratory blocks. Thus, timely ramp-up in producing fields would
improve investor confidence and lead to factor other prospective basins as well.
We maintain our Buy rating on RIL with an SOTP-based target price of `1,189.
Petrochemicals: The petrochemical segment’s revenue grew by 17.8% yoy and
8.1% qoq to `18,194cr due to higher polymer and polyester prices. On a
sequential basis, polymer margins were mixed, whereas polyester cracks were
higher due to tighter cotton market. Thus, the segment’s EBIT margin decreased
(also aided by base effect of higher revenue) by 78bp qoq to 14.4% (15.2%).
PP delta, which surged from US$94/MT during 2QFY2011 to US$239/MT in
3QFY2011, fell marginally to US$222/MT in 4QFY2011 as C3 prices increased
due to tightened C3 supplies. Similarly, margins in the HDPE-naphtha segment fell
to US$451/MT vs. US$486/MT during 3QFY2011, as naphtha prices moved faster
on higher crude prices. However, some strength in margin was seen in the PVCEDC
segment, which stood at US$439/MT as against US$395/MT in 3QFY2011.
Similarly, the polyester segment continued to benefit from acute shortage in cotton
globally (leading to increased substitution by polyester), with prices increasing by
20–35% across the polyester chain.
Oil and gas: The oil and gas segment’s EBIT registered 4.3% qoq growth to
`1,569cr (`1,504cr), despite lower production from the KG-D6 field, on account of
significant improvement in production from Panna and Mukta fields since
production was restored in October 2010. Gas production at the KG basin was
lower due to reservoir pressure constraints in the fields. RIL’s KG-D6 gas
production during the quarter averaged at ~51mmscmd as against
~54.5mmscmd in 3QFY2011. Crude oil production from the KG basin decreased
to ~16,666bpd in 4QFY2011 from ~19,400bpd in 3QFY2011. Thus, higher
production from PMT resulted in the segment reporting a 223bp qoq margin
expansion.
Investment arguments
Ramp-up in KG-D6 could allay many concerns: RIL is still producing natural gas
way below its potential 80mmscmd due to constraints over reservoir pressure.
Management has also not given any guidance on production ramp-up due to its
ongoing discussions with DGH; thus, due to pending clarity, overhang will
continue on the stock. However, we are confident about RIL ramping up its
production with the help of BP’s deepwater technology and expertise in the
medium term. The upstream segment still has significant upside in store,
considering huge untapped resources. Timely ramp-up in the producing fields
would improve investor sentiment and aid investors to factor in other prospective
basins as well.
Core business margins to stabilise: We expect refining margins to hold and rise in
the year ahead due to higher demand for middle distillates, supply disruptions and
increasing light-heavy crude oil differential. Similarly, the petrochemical segment’s
margin is also expected to stabilise at the current level. The recent spurt was
consequent to higher demand from emerging economies and stimulus-led
recovery in OECD economies. Thus, the extant businesses will be the near-term
growth drivers for RIL.
Newer ventures could be long-term catalysts: RIL has been actively eyeing
inorganic routes for diversifying its asset portfolio by entering into newer ventures.
Significant cash pile and treasury stocks could see RIL venturing into more
inorganic routes for growth and prove to be upside triggers for the stock. Out of all
the company’s recent initiatives, we find the shale gas venture the most promising
on account of the in-place reserves of ~12TCF.
Outlook and valuation
RIL’s extant businesses (refining and petrochemical) have been doing quite well
and we expect the company to report higher refining margins in the coming
quarters as FCCU of DTA Refinery has started. On the petrochemical side, we do
not expect margins to fall below the current level. Moreover, the company’s
proposed plans to increase capacity of the petrochemical segment and addition of
coker in the refining segment are likely to further consolidate its position in its
existing businesses. However, there are some concerns on the KG basin gas
output. Nevertheless, we believe RIL’s deal with BP is a positive one, as the
combined expertise of both the parties will result in optimisation of producing
blocks and enhancement of resources in exploratory blocks. Thus, timely ramp-up
in the producing fields would improve investor confidence and lead to factor other
prospective basins as well.
RIL’s significant cash pile and treasury stocks could see it venturing into more
inorganic avenues, which could provide upside triggers to the stock. We believe RIL
has already made significant investments in new businesses such as shale gas and
telecom and is likely to crystallise its plans to foray into the other segments.
This could address cash redeployment concerns to a large extent. Thus, we
maintain our Buy rating on RIL with an SOTP-based target price of `1,189.
Exhibit 10: SOTP valuation (FY2013E)
Business segment (` cr) `/share
Refining (EV/EBITDA 7x) 391
Petrochemical (EV/EBITDA 7x) 219
KG-D6 gas (DCF) 182
KG-MA oil (DCF) 45
NEC-25 (EV/boe 5.5x) 66
D3 (EV/boe 5.5x) 73
D9 (EV/boe 5.5x) 43
Shale gas ventures (EV/boe 3.5x) 70
Other prospective basins 41
Retail 30
Investment/Others 44
Total EV 1,204
Net debt (15)
Equity value (`) 1,189
Source: Company, Angel Research
India Equity Research Reports, IPO and Stock News
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Reliance Industries - 4QFY2011 Result Update
Angel Broking recommends Buy with a Target Price of Rs. 1189
For 4QFY2011, RIL reported 14.1% yoy growth in its bottom line due to higher
refining and petrochemical margins. On a qoq basis, PAT growth was restricted
to 4.7% because of the dip in production from KG-D6 field. Overall, numbers
were below our expectations on the top-line and bottom-line fronts on account of
lower-than-expected refining margins (due to the impact of FCCU shutdown) and
output from KG-D6 field. We maintain Buy on the stock.
Earnings post sequential as well as yoy growth: RIL’s top line increased by 26.2%
yoy to `72,674cr (`57,570cr), primarily on the back of 22.3% yoy growth in
refining revenue to `62,704cr (`51,250cr) and a 17.8% yoy increase in
petrochemical revenue to `18,194cr (`15,448cr). Growth in the refining and
petrochemical segments was due to higher product prices. Crude oil processed
during the quarter was flat at 16.7mn tonnes. KG-D6 gas production declined
sequentially, with average production at 51mmscmd (54.5mmscmd). Operating
profit grew by 7.7% yoy to `9,843cr (`9,136cr), which was below our estimate
due to lower-than-expected refining margins.
Outlook and valuation: RIL’s extant businesses (refining and petrochemical) have
been doing quite well and we expect the company to report higher refining
margins in the coming quarters as FCCU of DTA Refinery has started. On the
petrochemical side, we do not expect margins to fall below the current level.
However, there are some concerns on the KG basin gas output. Nevertheless, we
believe RIL’s deal with BP deal is a positive one, as the combined expertise of both
the parties will result in optimisation of producing blocks and enhancement of
resources in exploratory blocks. Thus, timely ramp-up in producing fields would
improve investor confidence and lead to factor other prospective basins as well.
We maintain our Buy rating on RIL with an SOTP-based target price of `1,189.
Segment-wise performance
Refining and marketing (R&M): During the quarter, crude processing stood flat at
16.7mn tonnes, with refinery reporting capacity utilisation of 108%. Despite flat
crude throughput, higher petroleum product prices led to a 22.3% yoy increase in
R&M revenue to `62,704cr (`51,250cr).
On the margin front, RIL reported GRMs of US$9.2/bbl (US$7.5/bbl), lower than
our expectation of US$10/bbl (due to impact of FCCU shutdown). Singapore
margins during the quarter averaged US$7.4/bbl. Thus, RIL managed to earn a
spread of US$1.8/bbl over the same. Improvement in refining margin was mainly
due to improved product spread of middle distillates on account of rising demand.
Besides healthy demand, product markets gained from the peak level of global
refinery maintenance during the quarter. Moreover, the increase in heavy-light
crude oil spread by US$1/bbl (due to strong light product markets, the Libyan crisis
leading to loss of light sweet crude and higher production from OPEC) during the
quarter led to higher refining margins. Refined product exports stood at 38.7MMT
(US$32.9bn) in FY2011 as against 32.8MMT (US$24.5bn) in FY2010 on
incremental export volumes from the SEZ refinery.
Petrochemicals: The petrochemical segment’s revenue grew by 17.8% yoy and
8.1% qoq to `18,194cr due to higher polymer and polyester prices. On a
sequential basis, polymer margins were mixed, whereas polyester cracks were
higher due to tighter cotton market. Thus, the segment’s EBIT margin decreased
(also aided by base effect of higher revenue) by 78bp qoq to 14.4% (15.2%).
PP delta, which surged from US$94/MT during 2QFY2011 to US$239/MT in
3QFY2011, fell marginally to US$222/MT in 4QFY2011 as C3 prices increased
due to tightened C3 supplies. Similarly, margins in the HDPE-naphtha segment fell
to US$451/MT vs. US$486/MT during 3QFY2011, as naphtha prices moved faster
on higher crude prices. However, some strength in margin was seen in the PVCEDC
segment, which stood at US$439/MT as against US$395/MT in 3QFY2011.
Similarly, the polyester segment continued to benefit from acute shortage in cotton
globally (leading to increased substitution by polyester), with prices increasing by
20–35% across the polyester chain.
Oil and gas: The oil and gas segment’s EBIT registered 4.3% qoq growth to
`1,569cr (`1,504cr), despite lower production from the KG-D6 field, on account of
significant improvement in production from Panna and Mukta fields since
production was restored in October 2010. Gas production at the KG basin was
lower due to reservoir pressure constraints in the fields. RIL’s KG-D6 gas
production during the quarter averaged at ~51mmscmd as against
~54.5mmscmd in 3QFY2011. Crude oil production from the KG basin decreased
to ~16,666bpd in 4QFY2011 from ~19,400bpd in 3QFY2011. Thus, higher
production from PMT resulted in the segment reporting a 223bp qoq margin
expansion.
Investment arguments
Ramp-up in KG-D6 could allay many concerns: RIL is still producing natural gas
way below its potential 80mmscmd due to constraints over reservoir pressure.
Management has also not given any guidance on production ramp-up due to its
ongoing discussions with DGH; thus, due to pending clarity, overhang will
continue on the stock. However, we are confident about RIL ramping up its
production with the help of BP’s deepwater technology and expertise in the
medium term. The upstream segment still has significant upside in store,
considering huge untapped resources. Timely ramp-up in the producing fields
would improve investor sentiment and aid investors to factor in other prospective
basins as well.
Core business margins to stabilise: We expect refining margins to hold and rise in
the year ahead due to higher demand for middle distillates, supply disruptions and
increasing light-heavy crude oil differential. Similarly, the petrochemical segment’s
margin is also expected to stabilise at the current level. The recent spurt was
consequent to higher demand from emerging economies and stimulus-led
recovery in OECD economies. Thus, the extant businesses will be the near-term
growth drivers for RIL.
Newer ventures could be long-term catalysts: RIL has been actively eyeing
inorganic routes for diversifying its asset portfolio by entering into newer ventures.
Significant cash pile and treasury stocks could see RIL venturing into more
inorganic routes for growth and prove to be upside triggers for the stock. Out of all
the company’s recent initiatives, we find the shale gas venture the most promising
on account of the in-place reserves of ~12TCF.
Outlook and valuation
RIL’s extant businesses (refining and petrochemical) have been doing quite well
and we expect the company to report higher refining margins in the coming
quarters as FCCU of DTA Refinery has started. On the petrochemical side, we do
not expect margins to fall below the current level. Moreover, the company’s
proposed plans to increase capacity of the petrochemical segment and addition of
coker in the refining segment are likely to further consolidate its position in its
existing businesses. However, there are some concerns on the KG basin gas
output. Nevertheless, we believe RIL’s deal with BP is a positive one, as the
combined expertise of both the parties will result in optimisation of producing
blocks and enhancement of resources in exploratory blocks. Thus, timely ramp-up
in the producing fields would improve investor confidence and lead to factor other
prospective basins as well.
RIL’s significant cash pile and treasury stocks could see it venturing into more
inorganic avenues, which could provide upside triggers to the stock. We believe RIL
has already made significant investments in new businesses such as shale gas and
telecom and is likely to crystallise its plans to foray into the other segments.
This could address cash redeployment concerns to a large extent. Thus, we
maintain our Buy rating on RIL with an SOTP-based target price of `1,189.
Exhibit 10: SOTP valuation (FY2013E)
Business segment (` cr) `/share
Refining (EV/EBITDA 7x) 391
Petrochemical (EV/EBITDA 7x) 219
KG-D6 gas (DCF) 182
KG-MA oil (DCF) 45
NEC-25 (EV/boe 5.5x) 66
D3 (EV/boe 5.5x) 73
D9 (EV/boe 5.5x) 43
Shale gas ventures (EV/boe 3.5x) 70
Other prospective basins 41
Retail 30
Investment/Others 44
Total EV 1,204
Net debt (15)
Equity value (`) 1,189
Source: Company, Angel Research
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