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Reliance Industries (RIL)
Energy
A miss. RIL reported weaker-than-expected net income at `53.8 bn versus our `55.4 bn
expectation. The miss was largely due to (1) weaker-than-expected performance of the
refining segment and (2) higher interest expense. We retain our REDUCE rating on the
stock with a revised 12-month SOTP-based target price of `1,080 (`1,000 previously).
We have rolled forward to FY2013E estimates versus FY2012E previously
Weaker-than-expected 4QFY11 results
RIL reported 4QFY11 EBITDA at `98.4 bn versus our estimated `100.5 bn and net income at `53.8
bn versus our estimated `55.4 bn. RIL has reported its results without considering the impact of an
ongoing stake sale of 30% stake in 23 E&P blocks to BP due to pending approvals. The effective
date of the BP-RIL deal is January 1, 2011. RIL’s end-FY2011 net debt stood at `250 bn compared
to `406 bn at end-FY2010, a decline of `156 bn. RIL generated gross cash of `345 bn and
received `90 bn as deposits from BP against ‘net’ capex of `60.7 bn. The consolidated entity has
written off `16 bn of charges in the P&L and against reserves.
Refining margins disappointed versus expectations; chemical segment performed well
RIL reported 4QFY11 refining margin at US$9.2/bbl against our estimated US$9.7/bbl, US$9/bbl in
3QFY11 and US$7.5/bbl in 4QFY10. 4QFY11 EBIT increased 3% qoq and 26% yoy to `25.1 bn.
The chemical segment’s EBIT increased to `26.3 bn from `24.3 bn in 3QFY11 (`22.2 bn in 4QFY10)
led by higher qoq, higher PE prices, PP margins and PSF/PFY spreads over naphtha.
KG D-6 gas production at 52 mcm/d; current production around 50 mcm/d
KG D-6 production in 4QFY11 was 51.8 mcm/d against 54.5 mcm/d in 3QFY11 and 59.8 mcm/d
in 4QFY10. Current production is around 50 mcm/d. Overall oil production stood at 0.36 mn tons
in 4QFY11 compared to 0.36 tons in 3QFY11 and 0.31 mn tons in 4QFY10. The qoq decline in gas
production reflects production problems at KG D-6 block.
Fine-tuned earnings estimates; rolled forward target price to FY2013E basis
We have fine-tuned FY2012E and FY2013E EPS estimates by +2% and -0.7% to `68 and `71 to
reflect 4QFY11 results and related minor changes. Our estimates factor in BP’s 30% stake in RIL’s
23 E&P blocks. Our revised 12-month fair valuation based on SOTP valuation is `1,080 compared
to `1,000 previously; we now use FY2013E estimates versus FY2012E estimates previously.
Financial highlights
EBITDA and net income. RIL’s 4QFY11 EBITDA increased 3.1% qoq (+7.7% yoy) to
`98.4 bn led by stronger performance of the chemical and refining segments qoq,
which offset lower KG D-6 production qoq. 4QFY11 net income increased 4.7% qoq
and 14.1% yoy to `53.8 bn. FY2011 net income grew 25% yoy to `203 bn while
EBITDA increased 24.7% yoy to `381 bn. On a consolidated basis, RIL’s FY2011 net
income was `193 bn; the lower figure versus standalone net income largely reflects
expenses of `8.1 bn in overseas blocks.
Other income. Other income increased 24% qoq to `9.2 bn likely reflecting
higher cash balance and interest rates in 4QFY11. RIL had cash and cash
equivalents of `424 bn at end-March 2011 versus `318 bn at end-December
2010 and `219 bn at end-March 2010.
Interest expense. 4QFY11 interest expense stood at `7 bn compared to `5.49 bn in
3QFY11; gross interest expense including interest capitalized of `1.2 bn was `8.2 bn.
RIL’s implied interest rate was 4.7% versus 3.9% in 3QFY11 and 4.4% in FY2010.
Exhibit 2 shows our computation of RIL’s implied borrowing cost over the past few
quarters.
DD&A charges. 4QFY11 DD&A was largely flat qoq and yoy at `33.9 bn. We
assume depletion would have declined qoq due to lower gas production, which
implies that deprecation may have increased qoq. RIL does not break out
depreciation and depletion separately. FY2011 DD&A was `136 bn compared to
`105 bn in FY2010.
Taxation. RIL’s 4QFY11 effective tax rate was 19.5% compared to 19.5% in
3QFY11 and 19.3% in 4QFY10. We note that RIL continues to provide for tax at the
MAT rate of 19.93% for gas produced from its KG D-6 block. FY2011 effective tax
rate stood at 19.6% compared to FY2010’s 21%.
Net debt. RIL’s end-4QFY11 net debt stood at `250 bn against `384 bn at end-
3QFY11 reflecting `88 bn of gross cash flow generation (net profit + DDA +
deferred taxation) and `90 bn of cash received from BP as advance for the ongoing
deal. Net capex (adjusted for foreign currency gains or losses on foreign currency
loans) was `20 bn in the quarter. We note that gross capex would have been higher
(the company has stopped disclosing that in its press release). However, we would
note that the net debt figure would capture the movement in foreign currency loans
also due to movement in currencies of foreign currency loans relative to the
reporting currency. Exhibit 3 gives details of movement in net debt over the past few
quarters and years.
RIL’s 4QFY11 polymer production volumes declined 9.6% qoq and 8.9% yoy to 0.99 mn
tons and FY2011 production was flat yoy at 4.1 mn tons. The flat volumes reflect
shutdown at its various cracker complexes at Hazira, Nagothane and Gandhar. FY2011
polyester volume increased 2.7% yoy to 1.71 mn tons. As per the company, domestic
polymer demand increased 10% yoy while domestic fiber and yarn demand increased
13% yoy in FY2011. RIL does not share sale volumes but it is possible that it may have
lost market share to new entrants such as Indian Oil Corp. as its production volumes have
been flat in a year with 10% and 13% growth in polymers and polyesters.
Refining segment highlights. 4QFY11 refining segment EBIT increased 3% qoq and
26% yoy to `25.1 bn driven by higher refining margins qoq (+US$0.2/bbl qoq to
US$9.2/bbl) and higher crude throughput of 16.7 mn tons (+0.6 mn tons). The qoq
increase in margin was much below those observed in benchmark margins and probably
reflects shutdown of certain downstream processing units at RIL’s Jamnagar refinery.
Exhibit 7 compares refining margin over the past several quarters with global benchmarks.
The strong yoy performance reflects higher refining margins (+US$1.8/bbl), which reflects
improvement in global margins. FY2011 refining margin stood at US$8.4/bbl against
US$6.6/bbl in FY2010. We would think that some portion of the yoy improvement in
margin would be due to adventitious gains from higher crude prices.
E&P segment highlights. 4QFY11 E&P segment EBIT increased 4.3% qoq despite lower
gas production from KG-D6 block reflecting higher oil prices. Oil production was flat qoq
at 362,000 tons compared to 361,000 tons in 3QFY11 but improved 15.2% yoy versus
314,000 tons in 4QFY10. 4QFY11 gas production was 157 bcf (including 145 bcf from
KG D-6 block) versus 174 bcf in 3QFY11 (including 163 bcf from KG D-6 block) and 185
bcf in 4QFY10 (including 171 bcf from KG D-6 block).
Earnings revisions and key assumptions behind earnings model
We have fine-tuned our FY2012E and FY2013E EPS to `68 and `71 from `66 and `72
previously to reflect FY2011 results and some minor changes. We discuss our key
assumptions and revisions to our earnings model below.
Refining margins. We model a modest improvement in RIL’s FY2012E and FY2013E
refining margin to US$9.5/bbl and US$10.1/bbl from US$8.4/bbl in FY2011 and
US$6.6/bbl in FY2010. In our view, FY2011 margins probably benefited from large
adventitious gains given a steep increase in crude oil and product prices during the year;
crude oil prices (Dated Brent) increased US$36/bbl between March 31, 2010 and March
31, 2011. Also, the improvement in global margins reflects one-off demand arising from
(1) use of diesel for power generation in China in 2HCY10 and (2) a severe winter in the
northern hemisphere. Thus, we would be careful in extrapolating FY2011 margins. Also,
we expect RIL’s reported margins to suffer from use of higher-priced spot LNG for internal
heating purposes compared to earlier use of cheaper domestic gas (KG D-6 block).
We expect underlying refining margins to decline from current levels and remain subdued
over the next 15-18 months given 3 mn b/d of refining capacity additions (see Exhibit 8)
and 1 mn b/d of additional NGL supply (see Exhibit 9) in CY2011-12E will offset likely
increase of 2.6 mn b/d in global oil demand. Exhibit 10 gives our key assumptions for
RIL’s refining division.
E&P volume assumptions. We model oil production for FY2012E, FY2013E and
FY2014E at 1.33 mn tons, 1.31 mn tons and 1.28 mn tons. We estimate oil production
from RIL’s MA-1 fields to increase to 25,000 b/d in FY2012-14E from 19,788 b/d in
4QFY11. We model FY2012E, FY2013E and FY2014E gas production from KG D-6 block
at 52 mcm/d, 65 mcm/d and 80 mcm/d. We note that RIL’s gas production from KG D-6
block has declined to 50-52 mcm/d currently and it has projected much lower numbers
for FY2013E compared to our estimates.
Other income. We model RIL’s other income to likely grow strongly over the next few
years driven by its increasing cash pile. We expect RIL to generate `842 bn of gross cash
flow and `631 bn of free cash flow in FY2012-14E. The quantum of other income will
depend on (1) RIL’s dividend policy; RIL has followed a conservative dividend pay-out
policy historically, (2) acquisitions and (3) capex, which would depend on new E&P
discoveries and kick-start of new petrochemical projects. RIL recently announced plans for
new PX, PTA and polyester units, which we have incorporated in our earnings model.
Taxation. We assume effective tax rate at 23.2%, 24.4% and 24.5% for FY2012E,
FY2013E and FY2014E against 19.6% in FY2011. We assume that RIL will continue to
avail of income tax exemption on gas production from KG D-6 block and prepare our
forecasts accordingly. However, in case the income tax exemption is not available, we
compute RIL’s FY2012E and FY2013E EPS to drop by 4.7% and 5.3% to `64.4 and `67.6.
Exchange rate. We assume Indian Rupee-US Dollar exchange rate at `45.5/US$ for
FY2012E and `44/US$ for FY2013E and FY2014E.
Valuation—12-month target price at `1,080 versus `1,000 previously
Rs 1000 presents our SOTP-based fair valuation based on FY2013E estimates. The upward
revision reflects roll-forward of our SOTP-based valuation to FY2013E versus FY2012E
previously. We assume a successful completion of the ongoing BP-RIL deal under which BP
will take 30% stake in 23 E&P blocks of RIL including KG D-6 block.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RIL)
Energy
A miss. RIL reported weaker-than-expected net income at `53.8 bn versus our `55.4 bn
expectation. The miss was largely due to (1) weaker-than-expected performance of the
refining segment and (2) higher interest expense. We retain our REDUCE rating on the
stock with a revised 12-month SOTP-based target price of `1,080 (`1,000 previously).
We have rolled forward to FY2013E estimates versus FY2012E previously
Weaker-than-expected 4QFY11 results
RIL reported 4QFY11 EBITDA at `98.4 bn versus our estimated `100.5 bn and net income at `53.8
bn versus our estimated `55.4 bn. RIL has reported its results without considering the impact of an
ongoing stake sale of 30% stake in 23 E&P blocks to BP due to pending approvals. The effective
date of the BP-RIL deal is January 1, 2011. RIL’s end-FY2011 net debt stood at `250 bn compared
to `406 bn at end-FY2010, a decline of `156 bn. RIL generated gross cash of `345 bn and
received `90 bn as deposits from BP against ‘net’ capex of `60.7 bn. The consolidated entity has
written off `16 bn of charges in the P&L and against reserves.
Refining margins disappointed versus expectations; chemical segment performed well
RIL reported 4QFY11 refining margin at US$9.2/bbl against our estimated US$9.7/bbl, US$9/bbl in
3QFY11 and US$7.5/bbl in 4QFY10. 4QFY11 EBIT increased 3% qoq and 26% yoy to `25.1 bn.
The chemical segment’s EBIT increased to `26.3 bn from `24.3 bn in 3QFY11 (`22.2 bn in 4QFY10)
led by higher qoq, higher PE prices, PP margins and PSF/PFY spreads over naphtha.
KG D-6 gas production at 52 mcm/d; current production around 50 mcm/d
KG D-6 production in 4QFY11 was 51.8 mcm/d against 54.5 mcm/d in 3QFY11 and 59.8 mcm/d
in 4QFY10. Current production is around 50 mcm/d. Overall oil production stood at 0.36 mn tons
in 4QFY11 compared to 0.36 tons in 3QFY11 and 0.31 mn tons in 4QFY10. The qoq decline in gas
production reflects production problems at KG D-6 block.
Fine-tuned earnings estimates; rolled forward target price to FY2013E basis
We have fine-tuned FY2012E and FY2013E EPS estimates by +2% and -0.7% to `68 and `71 to
reflect 4QFY11 results and related minor changes. Our estimates factor in BP’s 30% stake in RIL’s
23 E&P blocks. Our revised 12-month fair valuation based on SOTP valuation is `1,080 compared
to `1,000 previously; we now use FY2013E estimates versus FY2012E estimates previously.
Financial highlights
EBITDA and net income. RIL’s 4QFY11 EBITDA increased 3.1% qoq (+7.7% yoy) to
`98.4 bn led by stronger performance of the chemical and refining segments qoq,
which offset lower KG D-6 production qoq. 4QFY11 net income increased 4.7% qoq
and 14.1% yoy to `53.8 bn. FY2011 net income grew 25% yoy to `203 bn while
EBITDA increased 24.7% yoy to `381 bn. On a consolidated basis, RIL’s FY2011 net
income was `193 bn; the lower figure versus standalone net income largely reflects
expenses of `8.1 bn in overseas blocks.
Other income. Other income increased 24% qoq to `9.2 bn likely reflecting
higher cash balance and interest rates in 4QFY11. RIL had cash and cash
equivalents of `424 bn at end-March 2011 versus `318 bn at end-December
2010 and `219 bn at end-March 2010.
Interest expense. 4QFY11 interest expense stood at `7 bn compared to `5.49 bn in
3QFY11; gross interest expense including interest capitalized of `1.2 bn was `8.2 bn.
RIL’s implied interest rate was 4.7% versus 3.9% in 3QFY11 and 4.4% in FY2010.
Exhibit 2 shows our computation of RIL’s implied borrowing cost over the past few
quarters.
DD&A charges. 4QFY11 DD&A was largely flat qoq and yoy at `33.9 bn. We
assume depletion would have declined qoq due to lower gas production, which
implies that deprecation may have increased qoq. RIL does not break out
depreciation and depletion separately. FY2011 DD&A was `136 bn compared to
`105 bn in FY2010.
Taxation. RIL’s 4QFY11 effective tax rate was 19.5% compared to 19.5% in
3QFY11 and 19.3% in 4QFY10. We note that RIL continues to provide for tax at the
MAT rate of 19.93% for gas produced from its KG D-6 block. FY2011 effective tax
rate stood at 19.6% compared to FY2010’s 21%.
Net debt. RIL’s end-4QFY11 net debt stood at `250 bn against `384 bn at end-
3QFY11 reflecting `88 bn of gross cash flow generation (net profit + DDA +
deferred taxation) and `90 bn of cash received from BP as advance for the ongoing
deal. Net capex (adjusted for foreign currency gains or losses on foreign currency
loans) was `20 bn in the quarter. We note that gross capex would have been higher
(the company has stopped disclosing that in its press release). However, we would
note that the net debt figure would capture the movement in foreign currency loans
also due to movement in currencies of foreign currency loans relative to the
reporting currency. Exhibit 3 gives details of movement in net debt over the past few
quarters and years.
RIL’s 4QFY11 polymer production volumes declined 9.6% qoq and 8.9% yoy to 0.99 mn
tons and FY2011 production was flat yoy at 4.1 mn tons. The flat volumes reflect
shutdown at its various cracker complexes at Hazira, Nagothane and Gandhar. FY2011
polyester volume increased 2.7% yoy to 1.71 mn tons. As per the company, domestic
polymer demand increased 10% yoy while domestic fiber and yarn demand increased
13% yoy in FY2011. RIL does not share sale volumes but it is possible that it may have
lost market share to new entrants such as Indian Oil Corp. as its production volumes have
been flat in a year with 10% and 13% growth in polymers and polyesters.
Refining segment highlights. 4QFY11 refining segment EBIT increased 3% qoq and
26% yoy to `25.1 bn driven by higher refining margins qoq (+US$0.2/bbl qoq to
US$9.2/bbl) and higher crude throughput of 16.7 mn tons (+0.6 mn tons). The qoq
increase in margin was much below those observed in benchmark margins and probably
reflects shutdown of certain downstream processing units at RIL’s Jamnagar refinery.
Exhibit 7 compares refining margin over the past several quarters with global benchmarks.
The strong yoy performance reflects higher refining margins (+US$1.8/bbl), which reflects
improvement in global margins. FY2011 refining margin stood at US$8.4/bbl against
US$6.6/bbl in FY2010. We would think that some portion of the yoy improvement in
margin would be due to adventitious gains from higher crude prices.
E&P segment highlights. 4QFY11 E&P segment EBIT increased 4.3% qoq despite lower
gas production from KG-D6 block reflecting higher oil prices. Oil production was flat qoq
at 362,000 tons compared to 361,000 tons in 3QFY11 but improved 15.2% yoy versus
314,000 tons in 4QFY10. 4QFY11 gas production was 157 bcf (including 145 bcf from
KG D-6 block) versus 174 bcf in 3QFY11 (including 163 bcf from KG D-6 block) and 185
bcf in 4QFY10 (including 171 bcf from KG D-6 block).
Earnings revisions and key assumptions behind earnings model
We have fine-tuned our FY2012E and FY2013E EPS to `68 and `71 from `66 and `72
previously to reflect FY2011 results and some minor changes. We discuss our key
assumptions and revisions to our earnings model below.
Refining margins. We model a modest improvement in RIL’s FY2012E and FY2013E
refining margin to US$9.5/bbl and US$10.1/bbl from US$8.4/bbl in FY2011 and
US$6.6/bbl in FY2010. In our view, FY2011 margins probably benefited from large
adventitious gains given a steep increase in crude oil and product prices during the year;
crude oil prices (Dated Brent) increased US$36/bbl between March 31, 2010 and March
31, 2011. Also, the improvement in global margins reflects one-off demand arising from
(1) use of diesel for power generation in China in 2HCY10 and (2) a severe winter in the
northern hemisphere. Thus, we would be careful in extrapolating FY2011 margins. Also,
we expect RIL’s reported margins to suffer from use of higher-priced spot LNG for internal
heating purposes compared to earlier use of cheaper domestic gas (KG D-6 block).
We expect underlying refining margins to decline from current levels and remain subdued
over the next 15-18 months given 3 mn b/d of refining capacity additions (see Exhibit 8)
and 1 mn b/d of additional NGL supply (see Exhibit 9) in CY2011-12E will offset likely
increase of 2.6 mn b/d in global oil demand. Exhibit 10 gives our key assumptions for
RIL’s refining division.
E&P volume assumptions. We model oil production for FY2012E, FY2013E and
FY2014E at 1.33 mn tons, 1.31 mn tons and 1.28 mn tons. We estimate oil production
from RIL’s MA-1 fields to increase to 25,000 b/d in FY2012-14E from 19,788 b/d in
4QFY11. We model FY2012E, FY2013E and FY2014E gas production from KG D-6 block
at 52 mcm/d, 65 mcm/d and 80 mcm/d. We note that RIL’s gas production from KG D-6
block has declined to 50-52 mcm/d currently and it has projected much lower numbers
for FY2013E compared to our estimates.
Other income. We model RIL’s other income to likely grow strongly over the next few
years driven by its increasing cash pile. We expect RIL to generate `842 bn of gross cash
flow and `631 bn of free cash flow in FY2012-14E. The quantum of other income will
depend on (1) RIL’s dividend policy; RIL has followed a conservative dividend pay-out
policy historically, (2) acquisitions and (3) capex, which would depend on new E&P
discoveries and kick-start of new petrochemical projects. RIL recently announced plans for
new PX, PTA and polyester units, which we have incorporated in our earnings model.
Taxation. We assume effective tax rate at 23.2%, 24.4% and 24.5% for FY2012E,
FY2013E and FY2014E against 19.6% in FY2011. We assume that RIL will continue to
avail of income tax exemption on gas production from KG D-6 block and prepare our
forecasts accordingly. However, in case the income tax exemption is not available, we
compute RIL’s FY2012E and FY2013E EPS to drop by 4.7% and 5.3% to `64.4 and `67.6.
Exchange rate. We assume Indian Rupee-US Dollar exchange rate at `45.5/US$ for
FY2012E and `44/US$ for FY2013E and FY2014E.
Valuation—12-month target price at `1,080 versus `1,000 previously
Rs 1000 presents our SOTP-based fair valuation based on FY2013E estimates. The upward
revision reflects roll-forward of our SOTP-based valuation to FY2013E versus FY2012E
previously. We assume a successful completion of the ongoing BP-RIL deal under which BP
will take 30% stake in 23 E&P blocks of RIL including KG D-6 block.
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