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Reliance Industries (RIL)
Energy
Take some money off the table. RIL reported 2QFY12 net income at `57 bn (+0.7%
qoq and +15.8% yoy) versus our estimate of `56 bn. RIL’s EBITDA declined 0.8% qoq
to `98.4 bn in 2QFY12 reflecting (1) lower oil and gas production from KG D-6 block,
(2) lower share in KG D-6 block qoq due to completion of transfer of 30% share in KG
D-6 to BP in August 2011 and (3) lower refining margins; this was partly mitigated by
strong performance of the chemical segment. We revise our rating on RIL stock to ADD
from BUY noting the 14% rise over the past two months which leaves a moderate
upside of 15% to our SOTP-based target price of `1,000.
0.7% qoq increase in net income, 0.8% qoq decrease in EBITDA
RIL reported 2QFY12 net income at `57 bn versus `56.6 bn in 1QFY12; our estimate was `56 bn.
RIL’s 2QFY12 EBITDA declined 0.8% qoq (+4.8% yoy) to `98.4 bn led by (1) lower KG D-6
production, (2) weaker performance of the refining segment and (3) lower share of production
from KG D-6 block given completion of the BP-RIL deal in August 2011. Operational results were
helped by (1) weaker rupee and (2) stronger performance of the chemical segment.
Chemical segment surprises again; refining segment largely in line
2QFY12 chemical segment EBIT increased 9.3% qoq despite the weakness in global chemical
margins, presumably on account of (1) weaker rupee qoq and (2) likely higher sales volumes. RIL‘s
refining segment EBIT declined by 3.9% qoq to `30.8 bn led by lower refining margins at
US$10.1/bbl (-US$0.2/bbl qoq). Crude throughput was 17.1 mn tons (+0.1 mn tons qoq). E&P
segment EBIT increased 3.9% qoq despite lower production from KG-D6 block, led by lower
DD&A charge due to a reduction in gross block by the amount received from BP. KG D-6 gas
production declined to 45.3 mcm/d (-6.8% qoq) and MA-1 oil production declined to 16,087 b/d
(-9.6% qoq).
Reasonable valuations versus lack of positive triggers
We see the investment thesis on RIL stuck between (1) inexpensive valuations and (2) lack of
positive triggers. Valuations are reasonable at 12.3X FY2012E EPS and 12.2X FY2013E EPS. Our
reverse valuation exercise suggests that the market is ascribing low value to RIL’s E&P segment.
We expect improvement in sentiment for the stock from (1) any potential announcement on the
likely roadmap for revival of production from RIL’s KG D-6 block and (2) guidance from the
management on potential use of cash.
Revised rating to ADD versus BUY; revised earnings for FY2012-14E
We have revised our rating on RIL stock to ADD from BUY previously given its strong performance
over the past two months; the stock has risen 14% since August 16, 2011. We have revised our
FY2012E and FY2013E EPS to `70 and `71 from `69 and `71 previously, to reflect (1) 2QFY12
results, (2) higher chemical margins and (3) other minor changes. Key downside risks to our
earnings estimates stem from weaker-than-expected chemical and refining margins.
Valuation—12-month target price at `1,000
Exhibit 12 presents our SOTP-based fair valuation based on FY2013E estimates. We discuss
the valuation for each segment in detail below.
Refining segment. We value RIL’s refining segment at `331/share based on 6X FY2013E
EBITDA. We estimate the refining segment EBITDA of `165 bn in FY2013E based on midcycle
refining margins of US$10.4/bbl.
Petrochemical segment. We value RIL’s petrochemical segment at `231/share based on
6X FY2013E EBITDA. We estimate petrochemical segment EBITDA of `115 bn in FY2013E
based on modestly lower petchem margins versus FY2012E levels.
Upstream segment. We value RIL’s upstream segment at `192/share based on DCF for
the key blocks. We note that KG D-6 block contributes `99/share based on 8.2 tcf of
recoverable reserves (RIL’s share) and other developing blocks (NEC-25, KG D-3, KG D-9
and MN D-4) contribute `50/share based on 14.6 tcf of recoverable reserves (RIL’s share).
We see downside risks to our valuation of developing blocks given the delays in the
exploration activities.
Investments, loans and advances and other businesses. We value retail and SEZ
businesses at `23/share based on 0.8X book value. Other investments, loans and
advances and capital WIP contribute `143/share at 1X book value.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RIL)
Energy
Take some money off the table. RIL reported 2QFY12 net income at `57 bn (+0.7%
qoq and +15.8% yoy) versus our estimate of `56 bn. RIL’s EBITDA declined 0.8% qoq
to `98.4 bn in 2QFY12 reflecting (1) lower oil and gas production from KG D-6 block,
(2) lower share in KG D-6 block qoq due to completion of transfer of 30% share in KG
D-6 to BP in August 2011 and (3) lower refining margins; this was partly mitigated by
strong performance of the chemical segment. We revise our rating on RIL stock to ADD
from BUY noting the 14% rise over the past two months which leaves a moderate
upside of 15% to our SOTP-based target price of `1,000.
0.7% qoq increase in net income, 0.8% qoq decrease in EBITDA
RIL reported 2QFY12 net income at `57 bn versus `56.6 bn in 1QFY12; our estimate was `56 bn.
RIL’s 2QFY12 EBITDA declined 0.8% qoq (+4.8% yoy) to `98.4 bn led by (1) lower KG D-6
production, (2) weaker performance of the refining segment and (3) lower share of production
from KG D-6 block given completion of the BP-RIL deal in August 2011. Operational results were
helped by (1) weaker rupee and (2) stronger performance of the chemical segment.
Chemical segment surprises again; refining segment largely in line
2QFY12 chemical segment EBIT increased 9.3% qoq despite the weakness in global chemical
margins, presumably on account of (1) weaker rupee qoq and (2) likely higher sales volumes. RIL‘s
refining segment EBIT declined by 3.9% qoq to `30.8 bn led by lower refining margins at
US$10.1/bbl (-US$0.2/bbl qoq). Crude throughput was 17.1 mn tons (+0.1 mn tons qoq). E&P
segment EBIT increased 3.9% qoq despite lower production from KG-D6 block, led by lower
DD&A charge due to a reduction in gross block by the amount received from BP. KG D-6 gas
production declined to 45.3 mcm/d (-6.8% qoq) and MA-1 oil production declined to 16,087 b/d
(-9.6% qoq).
Reasonable valuations versus lack of positive triggers
We see the investment thesis on RIL stuck between (1) inexpensive valuations and (2) lack of
positive triggers. Valuations are reasonable at 12.3X FY2012E EPS and 12.2X FY2013E EPS. Our
reverse valuation exercise suggests that the market is ascribing low value to RIL’s E&P segment.
We expect improvement in sentiment for the stock from (1) any potential announcement on the
likely roadmap for revival of production from RIL’s KG D-6 block and (2) guidance from the
management on potential use of cash.
Revised rating to ADD versus BUY; revised earnings for FY2012-14E
We have revised our rating on RIL stock to ADD from BUY previously given its strong performance
over the past two months; the stock has risen 14% since August 16, 2011. We have revised our
FY2012E and FY2013E EPS to `70 and `71 from `69 and `71 previously, to reflect (1) 2QFY12
results, (2) higher chemical margins and (3) other minor changes. Key downside risks to our
earnings estimates stem from weaker-than-expected chemical and refining margins.
Valuation—12-month target price at `1,000
Exhibit 12 presents our SOTP-based fair valuation based on FY2013E estimates. We discuss
the valuation for each segment in detail below.
Refining segment. We value RIL’s refining segment at `331/share based on 6X FY2013E
EBITDA. We estimate the refining segment EBITDA of `165 bn in FY2013E based on midcycle
refining margins of US$10.4/bbl.
Petrochemical segment. We value RIL’s petrochemical segment at `231/share based on
6X FY2013E EBITDA. We estimate petrochemical segment EBITDA of `115 bn in FY2013E
based on modestly lower petchem margins versus FY2012E levels.
Upstream segment. We value RIL’s upstream segment at `192/share based on DCF for
the key blocks. We note that KG D-6 block contributes `99/share based on 8.2 tcf of
recoverable reserves (RIL’s share) and other developing blocks (NEC-25, KG D-3, KG D-9
and MN D-4) contribute `50/share based on 14.6 tcf of recoverable reserves (RIL’s share).
We see downside risks to our valuation of developing blocks given the delays in the
exploration activities.
Investments, loans and advances and other businesses. We value retail and SEZ
businesses at `23/share based on 0.8X book value. Other investments, loans and
advances and capital WIP contribute `143/share at 1X book value.
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