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Reliance Industries
F1Q12 Broadly in Line; Share
of Noncore Income Rising
Quick Comment: RIL reported its F1Q12 results with
EBITDA at 1.5% below our expectation. However, due to
higher other income, lower interest expenses and lower
depreciation, Net Profit came in broadly in line with our
expectation. We highlight that share of non-core operating
income continued to increase with ‘Other Income’ now
contributing 15% of PBT.
Refining division shines: GRMs were at solid
US$10.3/bbl leading to highest ever EBIT of Rs32bn (up
46%YoY, 18% QoQ). However, the spread over Singapore
complex GRMs came at US$1.7/bbl, lowest in last 20
quarters. RIL attributed weaker spreads to a) Higher priced
LNG replacing internal consumption of KG-D6 gas b) Lower
sulphur prices c) Improved Fuel Oil spreads used as
refinery fuel d) Subdued Light distillates. Refinery utilization
was at 110% and RIL is confident of sustaining such rates.
E&P Division volumes in line; flat to marginal decline
in production in next two years: KG-D6 gas volumes
averaged 48.6mmcsmd and oil at 15.5kbpd. RIL plans to
add 3 more wells to current 16 producing wells at KG-D6.
One well has been drilled and RIL is analyzing the data for
the additional wells. However, it need 2 years before these
wells are connected to production systems for any increase
in production; until then volumes are likely to remain flat or
decline marginally. Further, RIL plans to take a 15 day
shutdown of MA field that will result in production loss of
8mmscmd of gas and ~16kb/d of oil. We estimate a
marginal negative impact of 1.6% on earnings.
RIL-BP deal to be effective from next quarter; however
we believe this will not have a material impact on earnings
as fall in core EBITDA will largely be offset by increase in
non-core other income and lower depreciation. Overall, we
see a negative impact of 1.5% on earnings.
Petrochemical came weaker, RIL seeing improving
environment: Reported EBIT came at Rs22.2bn, down
15.7% sequentially. This was mainly due to weaker margins
in polyester and polymer chain. RIL believes that worst in
Petchem is largely behind and it has seen both volumes
and price pick up in July as compared to last month.
F1Q12 results in line; however, share of non-core
income continued to increase
RIL reported its F1Q12 results broadly in line with our
expectation. Reported EBITDA at Rs99.3bn (+0.8% QoQ,
6.3% YoY) was 1.5% below our expectation. However, due to
higher other income, lower interest expenses and lower
depreciation, Net Profit at Rs56.6bn (+5.3% QoQ, 17% YoY)
came in broadly in line with our expectation. We highlight that
share of non-core operating income continued to increase
with ‘Other Income’ now contributing 15% of PBT.
The effective tax rate for the company increased to ~22% for
the quarter due to introduction of MAT Tax on SEZs. The
company has guided for a tax rate of 22%-23%, which is in line
with our current assumption of 22%.
Refining Division Shines: RIL reported highest-ever EBIT of
Rs32bn for the refining division, which was up 27.5% QoQ and
57.2% on a YoY basis and 2.6% ahead of our expectation.
Solid GRMs: RIL’s F1Q12 GRMs came at solid US$10.3/bbl,
up 41%YoY and 12% sequentially. However, the spread over
Singapore complex GRMs reduced to US$1.7/bbl, which we
believe is the lowest in last 20 quarters. This is despite the fact
that Arab Light-Heavy spreads improved to US$5/bbl during
the quarter. RIL attributed weaker spreads to a) Higher priced
LNG replacing internal consumption of KG-D6 gas; b) Lower
sulphur prices; c) Improved Fuel Oil spreads used as refinery
fuel; d) Subdued Light distillates; e) Unfavorable Brent-Dubai
spreads caused higher crude prices.
Internal consumption of KG-D6 gas now almost nil: RIL’s
consumption of KG-D6 is now almost nil as compared to
7-8mmscmd during F1Q10 and ~3mmscmd in last quarter. We
believe this could have impacted GRMs negatively by
20-30cents/bbl.
Exhibit 1
RIL: Share of noncore income increasing
Other Income as % of PBT
15%
13%
10%
11%
12%
11%
12%
14%
15%
0%
2%
4%
6%
8%
10%
12%
14%
16%
F1Q10 F2Q10 F3Q10 F4Q10 F1Q11 F2Q11 F3Q11 F4Q11 F1Q12
Source: Company data, Morgan Stanley Research
Refinery utilization continues to remain impressive: RIL’s
refining throughput was at 17mn MT, up ~1.8% on QoQ as
the all CDU units worked over full capacity. Overall refinery
utilization rate was at ~110%. RIL is confident that it can
sustain such higher level of refinery utilization.
E&P performance broadly in line, RIL produced ~48.6
mmscmd of gas from the KG-D6 field,down 2.4% QoQ. Oil
production was at ~15.5 kb/d, down 11% QoQ. Oil & Gas
production from PMT fields was also down ~12% QoQ, and
gas production was down 5% on QoQ and 18% on a YoY basis.
Due to this, EBIT from oil & gas business declined 6% QoQ
and 23% on a YoY basis to Rs14.7bn.
Current production from KG D6: According to Infraline
RIL is producing ~47 mmscmd of gas from KG D6 fields of
which ~39mmscmd is from D1-D3 fields and ~8mmscmd
from MA1 field. Oil production is currently at ~15-15.5kb/d.
We currently assume 47mmscmd of gas and 15kb/d of oil
production in our numbers.
RIL to take maintenance shutdown at its MA field:
Further, RIL plans to take a 15-day shutdown of MA field that
will result in production loss of 8mmscmd of gas and ~16kb/d of
oil. We estimate a marginal negative impact of 1.6%.
Flat to marginal decline in production in next two years:
RIL is indicating that natural decline of D6 is now stabilizing as
the reservoir now seems to stabilize. RIL plans to add 3 more
wells to current 16 producing wells at KG-D6. One well has
already been drilled and RIL is analyzing the data for the
additional wells. However, it needs 2 years before these wells
are connected to production systems for any increase in
production; until then volumes are likely to remain flat or
decline marginally
Update on Exploration Activities
During the quarter, RIL notified two discoveries Dhirubhai-53 in
Well SA1 in CY PR-D6 block and Dhirubhai-54 in Well A2 in KG
III-D9 block to the Government.
Discovery Dhirubhai-53 announced in CYPR-D6 block: RIL
announced a rich gas and condensate discovery in the very
first well drilled in the CY-PR-DWN-2001/3 block located in
deepwater Cauvery-Palar basin. RIL currently holds 100%
participating interest in this block. This is one of the 23
exploration blocks where BP would have a 30% participating
interest subject to Government approval. RIL said that it is
difficult to provide any reserve estimate as this is still in the
early stages. Further appraisal activity is being planned to
assess the extent prospectively of the reservoirs along this play
trend.
Update on shale gas JVs: RIL claimed good progress in its
Shale gas JVs with continued drilling planned for F2012. RIL’s
share of gross production for all the three JVs put together was
at ~1.3mmscmd of gas. RIL has invested ~US$2.2bn in all the
three JVs put together. We estimate shale gas will start
contributing in F2013 with production of ~11 mmscmd (net to
RIL) and EBITDA of US$578mn, and ramp up meaningfully to
gas production of ~19 mmscmd and EBITDA of ~US$1bn by
F2014.
Petrochemical came in weaker as expected; RIL seeing
improving environment: The company reported
Petrochemical division’s EBIT at Rs22.2bn, down 16%
sequentially, in line with weaker margins in polyester and
polymer chain.
However, RIL believes that worst in Petrochemical is already
behind us, and it expects a stable to improving environment for
margins. The company is suggesting that both volumes and
prices picked up in the month of July compared to June.
Capacity expansion planned in Petrochemicals: RIL plans
to invest ~US$10-12bn for its Petrochemical expansion over
next few years. The planned capacities are likely to be
commissioned in next 2-3 years.
Valuation Methodology
Our price target is based on a sum-of-the-parts valuation.
1) We value the R&M business on an average F2012e
EV/EBITDA of 6.5x, which is the average of its global refining
peers. We value the R&M business at Rs320 per share.
2) The petrochemicals business valuation is based on an
average F2012 EV/EBITDA of 7.2x. We value the
Petrochemical business at Rs270 per share.
3) We use a P/CEPS target multiple-based valuation for RIL’s
E&P business. We assign a target multiple of 6.2x to our
average projected cash profits of US$3.2bn (F2012-16E) for
global comps, a 25% discount to global E&P companies for
F2012e. Based on this, we arrive at a fair value of US$20bn, or
Rs278 per share, for RIL’s E&P business.
4) We have valued RIL’s investments at 15% discount to the
F2011 book value, which includes RIL’s investment in telecom
business. This equates to a value of Rs74/share.
5) We also value RIL’s treasury shares at ~US$4.7bn, or
Rs66/share, a 15% discount to current market price to factor in
market volatility.
6) After deducting F2012e net debt of Rs53/share, we arrive at
SOTP value of Rs956/share.
We see the following key risks to our price target
1) The stock’s historical correlation with the market is 0.85x,
and hence a market correction would affect RIL.
2) The removal of the tax holiday for the E&P business.
Although Reliance’s product-sharing contract entitles it to a
seven-year tax holiday, the Ministry of Petroleum has
suggested that the matter is sub judice.
3) The overhang of Reliance stock held by the company’s
subsidiaries is currently valued at close to US$4.7bn.
4) Potential delays in the execution of the company’s business
plan.
5) A significant oil/gas discovery could lead to increases in
reserves and thus a positive revision to our price target.
Similarly, unfavorable exploration results from assets could
lead to downward revisions to resource estimates and hence a
negative impact on our price target.
6) A sharp decline in global economic growth that would likely
compress our projected petrochemical and refining margins.
Morgan Stanley & Co. Limited ("Morgan Stanley") is acting as
financial advisor to BP plc ("BP") in relation to the proposed
partnership with Reliance Industries Limited as announced on
21 February 2011. BP has agreed to pay fees to Morgan
Stanley for its financial services. Please refer to the notes at the
end of the report.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries
F1Q12 Broadly in Line; Share
of Noncore Income Rising
Quick Comment: RIL reported its F1Q12 results with
EBITDA at 1.5% below our expectation. However, due to
higher other income, lower interest expenses and lower
depreciation, Net Profit came in broadly in line with our
expectation. We highlight that share of non-core operating
income continued to increase with ‘Other Income’ now
contributing 15% of PBT.
Refining division shines: GRMs were at solid
US$10.3/bbl leading to highest ever EBIT of Rs32bn (up
46%YoY, 18% QoQ). However, the spread over Singapore
complex GRMs came at US$1.7/bbl, lowest in last 20
quarters. RIL attributed weaker spreads to a) Higher priced
LNG replacing internal consumption of KG-D6 gas b) Lower
sulphur prices c) Improved Fuel Oil spreads used as
refinery fuel d) Subdued Light distillates. Refinery utilization
was at 110% and RIL is confident of sustaining such rates.
E&P Division volumes in line; flat to marginal decline
in production in next two years: KG-D6 gas volumes
averaged 48.6mmcsmd and oil at 15.5kbpd. RIL plans to
add 3 more wells to current 16 producing wells at KG-D6.
One well has been drilled and RIL is analyzing the data for
the additional wells. However, it need 2 years before these
wells are connected to production systems for any increase
in production; until then volumes are likely to remain flat or
decline marginally. Further, RIL plans to take a 15 day
shutdown of MA field that will result in production loss of
8mmscmd of gas and ~16kb/d of oil. We estimate a
marginal negative impact of 1.6% on earnings.
RIL-BP deal to be effective from next quarter; however
we believe this will not have a material impact on earnings
as fall in core EBITDA will largely be offset by increase in
non-core other income and lower depreciation. Overall, we
see a negative impact of 1.5% on earnings.
Petrochemical came weaker, RIL seeing improving
environment: Reported EBIT came at Rs22.2bn, down
15.7% sequentially. This was mainly due to weaker margins
in polyester and polymer chain. RIL believes that worst in
Petchem is largely behind and it has seen both volumes
and price pick up in July as compared to last month.
F1Q12 results in line; however, share of non-core
income continued to increase
RIL reported its F1Q12 results broadly in line with our
expectation. Reported EBITDA at Rs99.3bn (+0.8% QoQ,
6.3% YoY) was 1.5% below our expectation. However, due to
higher other income, lower interest expenses and lower
depreciation, Net Profit at Rs56.6bn (+5.3% QoQ, 17% YoY)
came in broadly in line with our expectation. We highlight that
share of non-core operating income continued to increase
with ‘Other Income’ now contributing 15% of PBT.
The effective tax rate for the company increased to ~22% for
the quarter due to introduction of MAT Tax on SEZs. The
company has guided for a tax rate of 22%-23%, which is in line
with our current assumption of 22%.
Refining Division Shines: RIL reported highest-ever EBIT of
Rs32bn for the refining division, which was up 27.5% QoQ and
57.2% on a YoY basis and 2.6% ahead of our expectation.
Solid GRMs: RIL’s F1Q12 GRMs came at solid US$10.3/bbl,
up 41%YoY and 12% sequentially. However, the spread over
Singapore complex GRMs reduced to US$1.7/bbl, which we
believe is the lowest in last 20 quarters. This is despite the fact
that Arab Light-Heavy spreads improved to US$5/bbl during
the quarter. RIL attributed weaker spreads to a) Higher priced
LNG replacing internal consumption of KG-D6 gas; b) Lower
sulphur prices; c) Improved Fuel Oil spreads used as refinery
fuel; d) Subdued Light distillates; e) Unfavorable Brent-Dubai
spreads caused higher crude prices.
Internal consumption of KG-D6 gas now almost nil: RIL’s
consumption of KG-D6 is now almost nil as compared to
7-8mmscmd during F1Q10 and ~3mmscmd in last quarter. We
believe this could have impacted GRMs negatively by
20-30cents/bbl.
Exhibit 1
RIL: Share of noncore income increasing
Other Income as % of PBT
15%
13%
10%
11%
12%
11%
12%
14%
15%
0%
2%
4%
6%
8%
10%
12%
14%
16%
F1Q10 F2Q10 F3Q10 F4Q10 F1Q11 F2Q11 F3Q11 F4Q11 F1Q12
Source: Company data, Morgan Stanley Research
Refinery utilization continues to remain impressive: RIL’s
refining throughput was at 17mn MT, up ~1.8% on QoQ as
the all CDU units worked over full capacity. Overall refinery
utilization rate was at ~110%. RIL is confident that it can
sustain such higher level of refinery utilization.
E&P performance broadly in line, RIL produced ~48.6
mmscmd of gas from the KG-D6 field,down 2.4% QoQ. Oil
production was at ~15.5 kb/d, down 11% QoQ. Oil & Gas
production from PMT fields was also down ~12% QoQ, and
gas production was down 5% on QoQ and 18% on a YoY basis.
Due to this, EBIT from oil & gas business declined 6% QoQ
and 23% on a YoY basis to Rs14.7bn.
Current production from KG D6: According to Infraline
RIL is producing ~47 mmscmd of gas from KG D6 fields of
which ~39mmscmd is from D1-D3 fields and ~8mmscmd
from MA1 field. Oil production is currently at ~15-15.5kb/d.
We currently assume 47mmscmd of gas and 15kb/d of oil
production in our numbers.
RIL to take maintenance shutdown at its MA field:
Further, RIL plans to take a 15-day shutdown of MA field that
will result in production loss of 8mmscmd of gas and ~16kb/d of
oil. We estimate a marginal negative impact of 1.6%.
Flat to marginal decline in production in next two years:
RIL is indicating that natural decline of D6 is now stabilizing as
the reservoir now seems to stabilize. RIL plans to add 3 more
wells to current 16 producing wells at KG-D6. One well has
already been drilled and RIL is analyzing the data for the
additional wells. However, it needs 2 years before these wells
are connected to production systems for any increase in
production; until then volumes are likely to remain flat or
decline marginally
Update on Exploration Activities
During the quarter, RIL notified two discoveries Dhirubhai-53 in
Well SA1 in CY PR-D6 block and Dhirubhai-54 in Well A2 in KG
III-D9 block to the Government.
Discovery Dhirubhai-53 announced in CYPR-D6 block: RIL
announced a rich gas and condensate discovery in the very
first well drilled in the CY-PR-DWN-2001/3 block located in
deepwater Cauvery-Palar basin. RIL currently holds 100%
participating interest in this block. This is one of the 23
exploration blocks where BP would have a 30% participating
interest subject to Government approval. RIL said that it is
difficult to provide any reserve estimate as this is still in the
early stages. Further appraisal activity is being planned to
assess the extent prospectively of the reservoirs along this play
trend.
Update on shale gas JVs: RIL claimed good progress in its
Shale gas JVs with continued drilling planned for F2012. RIL’s
share of gross production for all the three JVs put together was
at ~1.3mmscmd of gas. RIL has invested ~US$2.2bn in all the
three JVs put together. We estimate shale gas will start
contributing in F2013 with production of ~11 mmscmd (net to
RIL) and EBITDA of US$578mn, and ramp up meaningfully to
gas production of ~19 mmscmd and EBITDA of ~US$1bn by
F2014.
Petrochemical came in weaker as expected; RIL seeing
improving environment: The company reported
Petrochemical division’s EBIT at Rs22.2bn, down 16%
sequentially, in line with weaker margins in polyester and
polymer chain.
However, RIL believes that worst in Petrochemical is already
behind us, and it expects a stable to improving environment for
margins. The company is suggesting that both volumes and
prices picked up in the month of July compared to June.
Capacity expansion planned in Petrochemicals: RIL plans
to invest ~US$10-12bn for its Petrochemical expansion over
next few years. The planned capacities are likely to be
commissioned in next 2-3 years.
Valuation Methodology
Our price target is based on a sum-of-the-parts valuation.
1) We value the R&M business on an average F2012e
EV/EBITDA of 6.5x, which is the average of its global refining
peers. We value the R&M business at Rs320 per share.
2) The petrochemicals business valuation is based on an
average F2012 EV/EBITDA of 7.2x. We value the
Petrochemical business at Rs270 per share.
3) We use a P/CEPS target multiple-based valuation for RIL’s
E&P business. We assign a target multiple of 6.2x to our
average projected cash profits of US$3.2bn (F2012-16E) for
global comps, a 25% discount to global E&P companies for
F2012e. Based on this, we arrive at a fair value of US$20bn, or
Rs278 per share, for RIL’s E&P business.
4) We have valued RIL’s investments at 15% discount to the
F2011 book value, which includes RIL’s investment in telecom
business. This equates to a value of Rs74/share.
5) We also value RIL’s treasury shares at ~US$4.7bn, or
Rs66/share, a 15% discount to current market price to factor in
market volatility.
6) After deducting F2012e net debt of Rs53/share, we arrive at
SOTP value of Rs956/share.
We see the following key risks to our price target
1) The stock’s historical correlation with the market is 0.85x,
and hence a market correction would affect RIL.
2) The removal of the tax holiday for the E&P business.
Although Reliance’s product-sharing contract entitles it to a
seven-year tax holiday, the Ministry of Petroleum has
suggested that the matter is sub judice.
3) The overhang of Reliance stock held by the company’s
subsidiaries is currently valued at close to US$4.7bn.
4) Potential delays in the execution of the company’s business
plan.
5) A significant oil/gas discovery could lead to increases in
reserves and thus a positive revision to our price target.
Similarly, unfavorable exploration results from assets could
lead to downward revisions to resource estimates and hence a
negative impact on our price target.
6) A sharp decline in global economic growth that would likely
compress our projected petrochemical and refining margins.
Morgan Stanley & Co. Limited ("Morgan Stanley") is acting as
financial advisor to BP plc ("BP") in relation to the proposed
partnership with Reliance Industries Limited as announced on
21 February 2011. BP has agreed to pay fees to Morgan
Stanley for its financial services. Please refer to the notes at the
end of the report.
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