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Reliance Industries
Reuters: RELI.BO Bloomberg: RIL IN Exchange: BSE
Ticker: RELI
Diesel cracks to strengthen?
RIL to benefit from expected tightening in diesel cracks
Wood Mackenzie estimates that robust demand in China should lead to significant
deficits in diesel supply by 2015, thereby propelling diesel cracks and higher gross
refining margins (GRMs). Regional diesel cracks have had a strong correlation with
China’s diesel trade. With refining contributing c.38% of RIL's EBIT, it will benefit
from the strength in GRMs but clarity on gas production ramp-up and capital
allocation will be equally important. We reiterate Buy with INR1,150 target price.
Diesel cracks to harden China’s demand strength
Our consulting partners, Wood Mackenzie, estimate that China will be short of
c.400kbpd in diesel/gas oil supply by 2015 (Figure 1). China’s diesel demand will
be driven by growth in road freight as its economic growth shifts from coastal
areas to inland regions. China is adding 2.9mbpd refining capacity over 2011-2017
or 420kbpd p.a. (Figure 2), lower than the 600kbpd p.a. estimated demand over
2011-17. China’s diesel deficit will come at a time when diesel deficit in Europe
will hit new highs, in part because of an impending specification switch for marine
bunkers. With Singapore diesel cracks having shown a strong correlation with
China’s diesel trade in the past (Figure 3), this will lead to rise in diesel spreads.
RIL will be a key beneficiary of this emerging trend as a US$1/bbl increase in
diesel cracks implies a c.US$0.4/bbl increase in its GRM. A US$1/bbl rise in GRM
implies a c.6-7% upside to RIL’s earnings.
Robust regional GRMs to reflect in RIL’s earnings from Q1FY12
We estimate RIL’s Q4FY11 GRM at $9.8-9.9/bbl. The planned shutdown of the
FCCU at RIL’s refinery for c.40 days would adversely impact GRMs, capacity
utilisation and opex. During Q4FY11, regional GRMs rose after capacity shutdown
due to the earthquake in Japan (Figures 6 and 7). Also, since RIL hedges part of its
margins, we believe its GRMs will lag the rise in spot regional GRMs. We expect
the benefits from high regional GRMs to flow through to RIL from Q1QFY12.
Reiterate Buy with INR1,150 target price; worsening global economy key risk
We reiterate our Buy rating on RIL with a target price of INR1,150/sh. Our SOTPbased valuation uses 7.5x FY12E EV/EBITDA for refining and petrochemicals and a
DCF (WACC 10.2%) for KG-D6 and exploration upside. Risks are 1) worsening
global economy; 2) production outages; and 3) policy vagaries.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries
Reuters: RELI.BO Bloomberg: RIL IN Exchange: BSE
Ticker: RELI
Diesel cracks to strengthen?
RIL to benefit from expected tightening in diesel cracks
Wood Mackenzie estimates that robust demand in China should lead to significant
deficits in diesel supply by 2015, thereby propelling diesel cracks and higher gross
refining margins (GRMs). Regional diesel cracks have had a strong correlation with
China’s diesel trade. With refining contributing c.38% of RIL's EBIT, it will benefit
from the strength in GRMs but clarity on gas production ramp-up and capital
allocation will be equally important. We reiterate Buy with INR1,150 target price.
Diesel cracks to harden China’s demand strength
Our consulting partners, Wood Mackenzie, estimate that China will be short of
c.400kbpd in diesel/gas oil supply by 2015 (Figure 1). China’s diesel demand will
be driven by growth in road freight as its economic growth shifts from coastal
areas to inland regions. China is adding 2.9mbpd refining capacity over 2011-2017
or 420kbpd p.a. (Figure 2), lower than the 600kbpd p.a. estimated demand over
2011-17. China’s diesel deficit will come at a time when diesel deficit in Europe
will hit new highs, in part because of an impending specification switch for marine
bunkers. With Singapore diesel cracks having shown a strong correlation with
China’s diesel trade in the past (Figure 3), this will lead to rise in diesel spreads.
RIL will be a key beneficiary of this emerging trend as a US$1/bbl increase in
diesel cracks implies a c.US$0.4/bbl increase in its GRM. A US$1/bbl rise in GRM
implies a c.6-7% upside to RIL’s earnings.
Robust regional GRMs to reflect in RIL’s earnings from Q1FY12
We estimate RIL’s Q4FY11 GRM at $9.8-9.9/bbl. The planned shutdown of the
FCCU at RIL’s refinery for c.40 days would adversely impact GRMs, capacity
utilisation and opex. During Q4FY11, regional GRMs rose after capacity shutdown
due to the earthquake in Japan (Figures 6 and 7). Also, since RIL hedges part of its
margins, we believe its GRMs will lag the rise in spot regional GRMs. We expect
the benefits from high regional GRMs to flow through to RIL from Q1QFY12.
Reiterate Buy with INR1,150 target price; worsening global economy key risk
We reiterate our Buy rating on RIL with a target price of INR1,150/sh. Our SOTPbased valuation uses 7.5x FY12E EV/EBITDA for refining and petrochemicals and a
DCF (WACC 10.2%) for KG-D6 and exploration upside. Risks are 1) worsening
global economy; 2) production outages; and 3) policy vagaries.
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