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Back to refining
■ EPS in line, EBITDA disappoints. RIL reported 1Q12 EPS of Rs17.3, in line
with our estimates and up 5% QoQ. EBITDA of Rs99.3 bn ($2.2bn) was 3%
below our estimates. Lower DD&A charges, higher other income and lower
interest costs offset higher taxes to keep PAT in line. The GRM of $10.3/bbl
and throughput of 17 MTPA beat estimates, but the petchem segment EBITDA
was 15% below estimates, hurt by a demand slow down (and de-stocking) for
both polymers and polyesters. The E&P segment EBITDA fell on volumes. KG
gas output averaged 48.6 mmscmd in 1Q (down 2.1 mmscmd QoQ). PMT oil
output fell a sharper 12% QoQ, negating the benefits of a stronger crude.
■ Finally, some outlook on KG gas. RIL has drilled another well at D1/D3 and
plans to drill two more wells (taking the number of total ‘new’ wells to five). Yet,
at the analyst meet, RIL suggested that it may not complete and connect these
(or more) wells for the next 2-3 years as it waits for (1) drilling results from new
wells and (2) government approvals, and (3) has enough wells to economise
the tendering of completion equipment and services. This effectively means KG
gas output will continue to creep down over the next several quarters.
■ Update model. We update our model to: (1) reflect the transaction with BP
and (2) cut FY13/14 KG gas output from 70/85 to 43/40 mmscmd. Higher
other income and lower DD&A means FY13E EPS falls marginally while
FY14E EPS falls 5% to Rs93. The reduction in E&P ‘asset’ valuations (KG
D6 gas, oil and upsides) means our TP falls more, from Rs1142 to Rs1057.
■ Wait on refining. Declining KG output and lacklustre near-term petchem
means the focus is back on RIL’s refining business. With the BP deal, RIL’s
cash flow quality may have deteriorated (with much larger ‘other income’);
yet, a positive view on refining and undemanding valuations lead us to retain
our positive view on the stock. The seasonal, late year strength in refining
can help. We maintain OUTPERFORM.
Back to refining
Reliance Industries reported 1Q FY12 EPS of Rs17.3, in line with our estimates, and up
5% QoQ (17% YoY). EBITDA grew only 1% QoQ, and was behind our estimates, but lower
depreciation, higher other income and lower interest costs meant PBT held up. RIL’s tax
rate increased 260 bp QoQ on higher MAT incidence at the SEZ refinery.
Headline gross refining margin (GRM) of US$10.3/bbl was higher than our estimate of
US$10/bbl. Refining throughput of 17 MTPA also surprised and contributed to refining
EBITDA being 10% ahead of our estimates. Despite this beat, RIL’s premium to Reuters
Singapore Complex margins has fallen QoQ, likely due to weaker naphtha margins and
flattish solids (pet-coke + sulphur) pricing. On a YoY basis, RIL’s reported margins have
also been hurt by the switch in natural gas input to the refineries—from the inexpensive KG
D6 gas to the much costlier LNG now.
The petrochemicals business disappointed. EBITDA at Rs26.8 bn was down 17%
sequentially and was 15% less than our estimates. In its quarterly presentation, RIL
pointed to a significant slowdown in demand for both polymers and polyesters (on
destocking and a genuine slowdown in demand). Larger potential discounting and a higher
proportion of exports as a consequence could have led to the petchem segment deviating
from our tracker (which is based on RIL’s monthly reported list prices).
E&P EBITDA also fell 6% QoQ to Rs30.9 bn. KG D6 gas output was at 48.6 mmscmd
(down from 50.7 mmscmd in 4Q11) and KG oil output fell from 16.3 kbopd to 15.5 kbopd.
The declines at PMT were sharper. Oil output fell 12% QoQ, while gas output fell 4% QoQ,
more than negating the benefits of higher oil prices.
Total depreciation was Rs1.7 bn less than our estimates. E&P DD&A fell as expected on
lower oil and gas output; but petchem DD&A fell a surprisingly sharp Rs1.2 bn QoQ.
Refining DD&A charges went up by Rs290 mn QoQ.
RIL’s standalone cash balances increased from Rs424 bn (US$9.4 bn) as of 31 March
2011 to Rs458 bn (US$10.2 bn) as of 30 June 2011. Other income increased as a
consequence, with implied yield remaining flat at c.9.8% (annualised). Interest charges fell
QoQ, mostly due to a reversal of foreign exchange costs. Interest costs in the P&L fell
QoQ, while interest costs capitalised increased. Gross interest costs have fallen to 4%
annualised (from 4.7% in 4Q11)—back to the 3Q11 levels.
At the analyst meet, RIL suggested that it has drilled another well at the D1/D3 gas fields in
KG D6 and that it will drill two more (in addition to the two wells that have already been
drilled but not completed). However, RIL will wait for: (1) results from these wells (2)
completion of all drilling and (3) government approvals before tendering for well completion
equipment. RIL estimates that well completion may therefore not happen for another 2-3
years. RIL believes KG gas output has stabilised and the declines henceforth will not be as
sharp as witnessed over the last few quarters. This is perhaps the first clear ‘guidance’ on
KG gas volume from RIL, and leads us to reduce our gas volume estimates through FY14.
More importantly, this clarification also postpones the expected near-term catalyst, clarity
on (and actual increase of) gas volume ramp up at D6. With the petchem business also
struggling near term, RIL’s EPS prospects are now more reliant on refining margins. In our
note, Two good years, at least, dated 27 Jun 2011, we have outlined our positive outlook
on refining margins in the region, with potential upside on seasonal distillate demand in
late 2011. Reliance should benefit from improving margins, which could be a potential
catalyst, though it is arguably less leveraged to the commodity improvement than regional
peers (due to other businesses and cash on balance sheet).
We update our model to reflect: (1) for lower gas output and (2) the BP transaction (which
for simplicity we account from FY13). FY13E EPS falls marginally, while FY14E EPS falls
from Rs98.0 to Rs93.4. Our target price falls from Rs1142 to Rs1057 (implying 20%
potential upside). Potential strength in refining and undemanding valuations are the
reasons we maintain our positive bias on RIL. We maintain OUTPERFORM
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Back to refining
■ EPS in line, EBITDA disappoints. RIL reported 1Q12 EPS of Rs17.3, in line
with our estimates and up 5% QoQ. EBITDA of Rs99.3 bn ($2.2bn) was 3%
below our estimates. Lower DD&A charges, higher other income and lower
interest costs offset higher taxes to keep PAT in line. The GRM of $10.3/bbl
and throughput of 17 MTPA beat estimates, but the petchem segment EBITDA
was 15% below estimates, hurt by a demand slow down (and de-stocking) for
both polymers and polyesters. The E&P segment EBITDA fell on volumes. KG
gas output averaged 48.6 mmscmd in 1Q (down 2.1 mmscmd QoQ). PMT oil
output fell a sharper 12% QoQ, negating the benefits of a stronger crude.
■ Finally, some outlook on KG gas. RIL has drilled another well at D1/D3 and
plans to drill two more wells (taking the number of total ‘new’ wells to five). Yet,
at the analyst meet, RIL suggested that it may not complete and connect these
(or more) wells for the next 2-3 years as it waits for (1) drilling results from new
wells and (2) government approvals, and (3) has enough wells to economise
the tendering of completion equipment and services. This effectively means KG
gas output will continue to creep down over the next several quarters.
■ Update model. We update our model to: (1) reflect the transaction with BP
and (2) cut FY13/14 KG gas output from 70/85 to 43/40 mmscmd. Higher
other income and lower DD&A means FY13E EPS falls marginally while
FY14E EPS falls 5% to Rs93. The reduction in E&P ‘asset’ valuations (KG
D6 gas, oil and upsides) means our TP falls more, from Rs1142 to Rs1057.
■ Wait on refining. Declining KG output and lacklustre near-term petchem
means the focus is back on RIL’s refining business. With the BP deal, RIL’s
cash flow quality may have deteriorated (with much larger ‘other income’);
yet, a positive view on refining and undemanding valuations lead us to retain
our positive view on the stock. The seasonal, late year strength in refining
can help. We maintain OUTPERFORM.
Back to refining
Reliance Industries reported 1Q FY12 EPS of Rs17.3, in line with our estimates, and up
5% QoQ (17% YoY). EBITDA grew only 1% QoQ, and was behind our estimates, but lower
depreciation, higher other income and lower interest costs meant PBT held up. RIL’s tax
rate increased 260 bp QoQ on higher MAT incidence at the SEZ refinery.
Headline gross refining margin (GRM) of US$10.3/bbl was higher than our estimate of
US$10/bbl. Refining throughput of 17 MTPA also surprised and contributed to refining
EBITDA being 10% ahead of our estimates. Despite this beat, RIL’s premium to Reuters
Singapore Complex margins has fallen QoQ, likely due to weaker naphtha margins and
flattish solids (pet-coke + sulphur) pricing. On a YoY basis, RIL’s reported margins have
also been hurt by the switch in natural gas input to the refineries—from the inexpensive KG
D6 gas to the much costlier LNG now.
The petrochemicals business disappointed. EBITDA at Rs26.8 bn was down 17%
sequentially and was 15% less than our estimates. In its quarterly presentation, RIL
pointed to a significant slowdown in demand for both polymers and polyesters (on
destocking and a genuine slowdown in demand). Larger potential discounting and a higher
proportion of exports as a consequence could have led to the petchem segment deviating
from our tracker (which is based on RIL’s monthly reported list prices).
E&P EBITDA also fell 6% QoQ to Rs30.9 bn. KG D6 gas output was at 48.6 mmscmd
(down from 50.7 mmscmd in 4Q11) and KG oil output fell from 16.3 kbopd to 15.5 kbopd.
The declines at PMT were sharper. Oil output fell 12% QoQ, while gas output fell 4% QoQ,
more than negating the benefits of higher oil prices.
Total depreciation was Rs1.7 bn less than our estimates. E&P DD&A fell as expected on
lower oil and gas output; but petchem DD&A fell a surprisingly sharp Rs1.2 bn QoQ.
Refining DD&A charges went up by Rs290 mn QoQ.
RIL’s standalone cash balances increased from Rs424 bn (US$9.4 bn) as of 31 March
2011 to Rs458 bn (US$10.2 bn) as of 30 June 2011. Other income increased as a
consequence, with implied yield remaining flat at c.9.8% (annualised). Interest charges fell
QoQ, mostly due to a reversal of foreign exchange costs. Interest costs in the P&L fell
QoQ, while interest costs capitalised increased. Gross interest costs have fallen to 4%
annualised (from 4.7% in 4Q11)—back to the 3Q11 levels.
At the analyst meet, RIL suggested that it has drilled another well at the D1/D3 gas fields in
KG D6 and that it will drill two more (in addition to the two wells that have already been
drilled but not completed). However, RIL will wait for: (1) results from these wells (2)
completion of all drilling and (3) government approvals before tendering for well completion
equipment. RIL estimates that well completion may therefore not happen for another 2-3
years. RIL believes KG gas output has stabilised and the declines henceforth will not be as
sharp as witnessed over the last few quarters. This is perhaps the first clear ‘guidance’ on
KG gas volume from RIL, and leads us to reduce our gas volume estimates through FY14.
More importantly, this clarification also postpones the expected near-term catalyst, clarity
on (and actual increase of) gas volume ramp up at D6. With the petchem business also
struggling near term, RIL’s EPS prospects are now more reliant on refining margins. In our
note, Two good years, at least, dated 27 Jun 2011, we have outlined our positive outlook
on refining margins in the region, with potential upside on seasonal distillate demand in
late 2011. Reliance should benefit from improving margins, which could be a potential
catalyst, though it is arguably less leveraged to the commodity improvement than regional
peers (due to other businesses and cash on balance sheet).
We update our model to reflect: (1) for lower gas output and (2) the BP transaction (which
for simplicity we account from FY13). FY13E EPS falls marginally, while FY14E EPS falls
from Rs98.0 to Rs93.4. Our target price falls from Rs1142 to Rs1057 (implying 20%
potential upside). Potential strength in refining and undemanding valuations are the
reasons we maintain our positive bias on RIL. We maintain OUTPERFORM
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