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Reliance Industries Ltd (RIL) announced a buyback of 120mn shares (upto
INR870/share), signaling the management’s view on the stock’s undervaluation,
which we also endorse. The buyback will help distribute cash
to shareholders in a tax efficient way besides being accretive to earnings.
The Q3FY12 PAT of INR44.4bn was marginally lower than the estimated
INR45.11bn due to lower GRMs at USD6.8/bbl (expected USD7.25/bbl).
RIL has received approval for development plan for satellite fields (four
discoveries) which we see as a positive (at least the regulatory machinery
has started moving). We are moderately positive on the refining segment
as the net increase in capacities in CY12 is expected to lag incremental
demand. Maintain ‘BUY’.
Average gas output at 41.9 mmscmd in Q3FY12, exit rate at ~38
Production continued to decline from KG‐D6 during Q3FY12 and was down by 3.3
mmsmcd sequentially to 41.9 mmscmd. Considering the fall in output, we have
reduced our FY12E/FY13E gas production estimate to 43.0/36.5 mmscmd against
44.2/39.0 mmscmd projected earlier. We believe that the Q3FY12 exit rate for gas was
~38.0 mmscmd.
GRMs disappoint at USD6.8/bbl, petchem volume down QoQ
At USD6.8/bbl (down USD3.3/bbl QoQ), GRM was below our estimate of USD7.3/bbl
while the throughput of 17.2 mt (up 1% QoQ) was modestly ahead of our estimate (the
highest ever). Petchem volume decreased by 0.2 mt QoQ to average 5.5 mt. The
average petchem EBITDA of USD153/mt was lower by 20% QoQ primarily due to lower
polyester intermediate and PTA/MEG margins.
Outlook and valuations: Buyback a key positive; maintain ‘BUY’
We are rolling over our SOTP to March‐13 from March‐12 earlier. However, we are
now valuing RIL’s refining business at 6.0x EV/EBITDA against 6.5x earlier mainly due to
slowdown in world crude demand. We now arrive at a SOTP of INR1,081/share for
Mar‐13. We maintain our ‘BUY/Sector Outperformer’ recommendation/rating on the
stock. At CMP of INR793, RIL is trading at 6.6x EV/EBITDA and 11.5x P/E on FY13
estimates.
EPS, SOTP revised downward
We are cutting down our FY12E EPS and FY13E EPS by 7.7 % and 10.2% to INR64.1/share
and INR68.7/share respectively (reasons below). We have also cut our SOTP by INR53/share
to INR1,081 per share.
Changes to our model:
• INR/USD assumption changed to 48.6/50.0 for FY12/13 from 48.0/48.0 earlier.
• GRMs cut to USD8.75/bbl (USD9.25/bbl earlier) and USD9.0/bbl (USD10.0/bbl earlier)
for FY12 and FY13 respectively. We are positive on GRMs as estimated net refinery
capacity addition in CY12 is lower than the incremental demand. However, our GRM
assumptions are muted due to global slowdown.
• Gas production from KG‐D6 moderated to 43.0 mmscmd and 36.5 mmscmd from 44.2
mmscmd and 39.0 mmscmd for FY12 and FY13 respectively.
• Reduced EBITDA margins for polyester intermediaries and PTA/MEG.
• SOTP has been cut to INR1,081/share to incorporate cut in value in refining segment.
Buyback of INR100bn announced, but actual sum is key
• RIL board has approved buyback of 120mn shares, ~3.6% of the total outstanding
shares.
• Buyback price not to exceed INR870/share (~10% premium to Friday’s closing price of
INR792), implying a maximum buyback amount of INR100.44 bn
• We had expected a buyback of INR160bn. RIL’s cash and cash equivalent as on
December 31, 2011 is INR745bn.
• During the last buyback announced on December 27, 2004 for 105mn shares (3.76% of
shares outstanding) at (not more than) INR30bn (10% of net worth), only 2.87mn
shares were actually bought back (5% of announced sum).
Thus, while the announced buyback is positive from the point of view of cash utilization, the
actual buyback amount is the key.
Management, during the analyst meet, stated the following on the buy‐back plan:
• It is a tax efficient way of distributing dividends to shareholders
• Management has announced a buyback taking into account the earnings growth and
valuation of the stock
• Buyback will be earnings accretive
• Stock will be bought from the market and extinguished as per SEBI norms
• While there is a SEBI guidance that companies must execute at least 25% of announced
buyback, this is not mandatory. However, the management seemed confident of
executing the same
Other highlights
• Depreciation of INR25.7bn (vs. INR29.7bn in Q2FY12) was lower QoQ due to lower
depreciation in O&G (down INR3.9bn QoQ) as a result of transfer of 30% stake to BP in
21 blocks.
• Other income of INR17.2bn (vs INR11.0bn in Q2FY12) was up QoQ due to interest
earned on higher cash balances. We estimate the other income yield at 10.1%.
• Interest and finance charges at INR6.9bn (vs INR6.6bn in Q2FY12) were higher due to
higher foreign exchange difference.
• Effective tax rate was almost flat QoQ at 22.6%.
• RIL spent INR 13.1 bn as cash capex during the quarter.
• Cash balance increased by INR130bn QoQ to INR745bn due to cash received from BP in
regards to the deal.
• Net debt free post Q3FY12: RIL reported debt of INR745bn as of end‐Q3FY12 against
INR713.9bn in Q2FY12 due to rupee depreciation against dollar. Net gearing is down to
0% QoQ to 5.4%.
Oil & gas: Decline in KG‐D6 output continues
KG‐D6 gas production at 41.9 mmscmd (expected 41.75 mmscmd): Gross gas production
from KG‐D6 continues to disappoint as it was down 3.3 mmscmd QoQ to average 41.9
mmscmd. Exit rate as on December 31, 2011 was ~38 mmscmd. We have cut our FY12/13
KG‐D6 gas production estimates by 1.2/2.5 mmscmd.
PMT gas production lower by 5.2% QoQ: Gross gas output from the Panna‐Mukta and Tapti
fields remained in natural decline mode and averaged 3.4 mmscmd (down 5.2% QoQ) while
the oil production fell 4.5% QoQ to 0.11 mt.
Satellite fields: The management committee during Q3FY12 approved the optimized field
development plan (OFDP) for its 4 satellite fields.
Other domestic and CBM blocks: RIL obtained commerciality for discovery of D33 in GSOSN‐
2000/1 while it relinquished AS‐ONN‐2000/1 block (poor prospects). In regards to the
CBM blocks, the company drilled ten development wells (total 36) during the quarter
commenced hydro fracturing of these blocks.
International blocks: Cumulative exit rate from Chevron, Pioneer and Carrizo shale acreage
was 233 mmscfd of gas and 34,728 bpd of gas condensate
Outlook and valuations: Buyback on cards; maintain ‘BUY’
We are rolling over our SOTP to March‐13 from March‐12 earlier. However, we are now
valuing RIL’s refining business at 6.0x EV/EBITDA against 6.5x earlier mainly due to (a)
slowdown in world demand for crude and (b) decrease in trading multiples of international
peers (International peers median at 6.0x EV/EBITDA). Keeping our old valuation matrix, and
after making changes to our model (refer page 2), we get an SOTP of INR 1,129/share after
roll over to Mar‐13. However, based on our new valuation multiples, we arrive at an SOTP of
INR 1,081/share for RIL for Mar‐13. We believe the announcement of buyback of shares will
support the market prices in the short term, but what remains to be seen is the actual
quantity of the buyback (bought back only 5% of the announced sum during last buy back in
January 2005). We maintain our ‘BUY/Sector Outperformer’ recommendation/rating on the
stock. At CMP of INR 793, RIL is trading at 6.6x EV/EBITDA and 11.5x P/E on FY13 estimates.
Company Description
RIL is the largest private player in the refining, petrochemical, and E&P sectors in India.
Historically RIL’s refining and petrochemical segments have contributed ~90% to its total
revenues, while in terms of EBIT, the contribution is broadly 36% Petchems, 36% Refining,
and 28% E&P. RIL is also expanding its presence in the areas of consumer retailing and urban
infrastructure, but EBIT contribution from these ‘other’ businesses is <1%. RIL has a
weightage of roughly 12.8% in the BSE Sensex and 10.6% in the S&P CNX Nifty Index.
Investment Theme
RIL’s strength lies in its ability to build businesses of global size and scale and execute
complex, time‐critical, and capital‐intensive projects, which will prove advantageous in its
huge plans in the E&P sector, organised retailing, and SEZ infrastructure. Also, there could
be a potential upward revision to our estimated in‐place reserves. With its foray into
consumer retailing and SEZ infrastructure, we believe, it is an ideal company to play the
India story.
Key Risks
RIL benefits from protected refinery margins in the Indian market, due to duty differential
between products and crude. Reduction in the duty differential will be negative for the
company.
Rupee appreciation may impact negatively as RIL is positively leveraged to the depreciating
currency.
Slow down in global demand could impact RIL’s refining and chemical margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries Ltd (RIL) announced a buyback of 120mn shares (upto
INR870/share), signaling the management’s view on the stock’s undervaluation,
which we also endorse. The buyback will help distribute cash
to shareholders in a tax efficient way besides being accretive to earnings.
The Q3FY12 PAT of INR44.4bn was marginally lower than the estimated
INR45.11bn due to lower GRMs at USD6.8/bbl (expected USD7.25/bbl).
RIL has received approval for development plan for satellite fields (four
discoveries) which we see as a positive (at least the regulatory machinery
has started moving). We are moderately positive on the refining segment
as the net increase in capacities in CY12 is expected to lag incremental
demand. Maintain ‘BUY’.
Average gas output at 41.9 mmscmd in Q3FY12, exit rate at ~38
Production continued to decline from KG‐D6 during Q3FY12 and was down by 3.3
mmsmcd sequentially to 41.9 mmscmd. Considering the fall in output, we have
reduced our FY12E/FY13E gas production estimate to 43.0/36.5 mmscmd against
44.2/39.0 mmscmd projected earlier. We believe that the Q3FY12 exit rate for gas was
~38.0 mmscmd.
GRMs disappoint at USD6.8/bbl, petchem volume down QoQ
At USD6.8/bbl (down USD3.3/bbl QoQ), GRM was below our estimate of USD7.3/bbl
while the throughput of 17.2 mt (up 1% QoQ) was modestly ahead of our estimate (the
highest ever). Petchem volume decreased by 0.2 mt QoQ to average 5.5 mt. The
average petchem EBITDA of USD153/mt was lower by 20% QoQ primarily due to lower
polyester intermediate and PTA/MEG margins.
Outlook and valuations: Buyback a key positive; maintain ‘BUY’
We are rolling over our SOTP to March‐13 from March‐12 earlier. However, we are
now valuing RIL’s refining business at 6.0x EV/EBITDA against 6.5x earlier mainly due to
slowdown in world crude demand. We now arrive at a SOTP of INR1,081/share for
Mar‐13. We maintain our ‘BUY/Sector Outperformer’ recommendation/rating on the
stock. At CMP of INR793, RIL is trading at 6.6x EV/EBITDA and 11.5x P/E on FY13
estimates.
EPS, SOTP revised downward
We are cutting down our FY12E EPS and FY13E EPS by 7.7 % and 10.2% to INR64.1/share
and INR68.7/share respectively (reasons below). We have also cut our SOTP by INR53/share
to INR1,081 per share.
Changes to our model:
• INR/USD assumption changed to 48.6/50.0 for FY12/13 from 48.0/48.0 earlier.
• GRMs cut to USD8.75/bbl (USD9.25/bbl earlier) and USD9.0/bbl (USD10.0/bbl earlier)
for FY12 and FY13 respectively. We are positive on GRMs as estimated net refinery
capacity addition in CY12 is lower than the incremental demand. However, our GRM
assumptions are muted due to global slowdown.
• Gas production from KG‐D6 moderated to 43.0 mmscmd and 36.5 mmscmd from 44.2
mmscmd and 39.0 mmscmd for FY12 and FY13 respectively.
• Reduced EBITDA margins for polyester intermediaries and PTA/MEG.
• SOTP has been cut to INR1,081/share to incorporate cut in value in refining segment.
Buyback of INR100bn announced, but actual sum is key
• RIL board has approved buyback of 120mn shares, ~3.6% of the total outstanding
shares.
• Buyback price not to exceed INR870/share (~10% premium to Friday’s closing price of
INR792), implying a maximum buyback amount of INR100.44 bn
• We had expected a buyback of INR160bn. RIL’s cash and cash equivalent as on
December 31, 2011 is INR745bn.
• During the last buyback announced on December 27, 2004 for 105mn shares (3.76% of
shares outstanding) at (not more than) INR30bn (10% of net worth), only 2.87mn
shares were actually bought back (5% of announced sum).
Thus, while the announced buyback is positive from the point of view of cash utilization, the
actual buyback amount is the key.
Management, during the analyst meet, stated the following on the buy‐back plan:
• It is a tax efficient way of distributing dividends to shareholders
• Management has announced a buyback taking into account the earnings growth and
valuation of the stock
• Buyback will be earnings accretive
• Stock will be bought from the market and extinguished as per SEBI norms
• While there is a SEBI guidance that companies must execute at least 25% of announced
buyback, this is not mandatory. However, the management seemed confident of
executing the same
Other highlights
• Depreciation of INR25.7bn (vs. INR29.7bn in Q2FY12) was lower QoQ due to lower
depreciation in O&G (down INR3.9bn QoQ) as a result of transfer of 30% stake to BP in
21 blocks.
• Other income of INR17.2bn (vs INR11.0bn in Q2FY12) was up QoQ due to interest
earned on higher cash balances. We estimate the other income yield at 10.1%.
• Interest and finance charges at INR6.9bn (vs INR6.6bn in Q2FY12) were higher due to
higher foreign exchange difference.
• Effective tax rate was almost flat QoQ at 22.6%.
• RIL spent INR 13.1 bn as cash capex during the quarter.
• Cash balance increased by INR130bn QoQ to INR745bn due to cash received from BP in
regards to the deal.
• Net debt free post Q3FY12: RIL reported debt of INR745bn as of end‐Q3FY12 against
INR713.9bn in Q2FY12 due to rupee depreciation against dollar. Net gearing is down to
0% QoQ to 5.4%.
Oil & gas: Decline in KG‐D6 output continues
KG‐D6 gas production at 41.9 mmscmd (expected 41.75 mmscmd): Gross gas production
from KG‐D6 continues to disappoint as it was down 3.3 mmscmd QoQ to average 41.9
mmscmd. Exit rate as on December 31, 2011 was ~38 mmscmd. We have cut our FY12/13
KG‐D6 gas production estimates by 1.2/2.5 mmscmd.
PMT gas production lower by 5.2% QoQ: Gross gas output from the Panna‐Mukta and Tapti
fields remained in natural decline mode and averaged 3.4 mmscmd (down 5.2% QoQ) while
the oil production fell 4.5% QoQ to 0.11 mt.
Satellite fields: The management committee during Q3FY12 approved the optimized field
development plan (OFDP) for its 4 satellite fields.
Other domestic and CBM blocks: RIL obtained commerciality for discovery of D33 in GSOSN‐
2000/1 while it relinquished AS‐ONN‐2000/1 block (poor prospects). In regards to the
CBM blocks, the company drilled ten development wells (total 36) during the quarter
commenced hydro fracturing of these blocks.
International blocks: Cumulative exit rate from Chevron, Pioneer and Carrizo shale acreage
was 233 mmscfd of gas and 34,728 bpd of gas condensate
Outlook and valuations: Buyback on cards; maintain ‘BUY’
We are rolling over our SOTP to March‐13 from March‐12 earlier. However, we are now
valuing RIL’s refining business at 6.0x EV/EBITDA against 6.5x earlier mainly due to (a)
slowdown in world demand for crude and (b) decrease in trading multiples of international
peers (International peers median at 6.0x EV/EBITDA). Keeping our old valuation matrix, and
after making changes to our model (refer page 2), we get an SOTP of INR 1,129/share after
roll over to Mar‐13. However, based on our new valuation multiples, we arrive at an SOTP of
INR 1,081/share for RIL for Mar‐13. We believe the announcement of buyback of shares will
support the market prices in the short term, but what remains to be seen is the actual
quantity of the buyback (bought back only 5% of the announced sum during last buy back in
January 2005). We maintain our ‘BUY/Sector Outperformer’ recommendation/rating on the
stock. At CMP of INR 793, RIL is trading at 6.6x EV/EBITDA and 11.5x P/E on FY13 estimates.
Company Description
RIL is the largest private player in the refining, petrochemical, and E&P sectors in India.
Historically RIL’s refining and petrochemical segments have contributed ~90% to its total
revenues, while in terms of EBIT, the contribution is broadly 36% Petchems, 36% Refining,
and 28% E&P. RIL is also expanding its presence in the areas of consumer retailing and urban
infrastructure, but EBIT contribution from these ‘other’ businesses is <1%. RIL has a
weightage of roughly 12.8% in the BSE Sensex and 10.6% in the S&P CNX Nifty Index.
Investment Theme
RIL’s strength lies in its ability to build businesses of global size and scale and execute
complex, time‐critical, and capital‐intensive projects, which will prove advantageous in its
huge plans in the E&P sector, organised retailing, and SEZ infrastructure. Also, there could
be a potential upward revision to our estimated in‐place reserves. With its foray into
consumer retailing and SEZ infrastructure, we believe, it is an ideal company to play the
India story.
Key Risks
RIL benefits from protected refinery margins in the Indian market, due to duty differential
between products and crude. Reduction in the duty differential will be negative for the
company.
Rupee appreciation may impact negatively as RIL is positively leveraged to the depreciating
currency.
Slow down in global demand could impact RIL’s refining and chemical margins.
I feel the Reliance should focus on Improving their Business more than bothering about their share value. An CEO should focus on increasing their business than pleasing their share holders.
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