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RELIANCE INDUSTRIES
Five-year-high discount
Strong refining; weak petchem in 1Q. Maintain BUY.
Reliance’s 1QFY12 net rose 5% QoQ to Rs56.5bn: in line with our estimate
but boosted by below-Ebitda items. Ebitda was flat QoQ: higher-thanexpected refining offset weaker petchem. BP deal approval should help
with the KG-D6 problems, but an output rebound will take two to three
years. Meanwhile the overseas shale ventures should gain scale and add
8-10% to Ebitda. With valuations attractive at a 25% PE discount to the
Sensex and an 8-20% discount to global peers, we maintain our BUY call.
Net profit up 5% in 1QFY12. Reliance’s (RIL IB H - Rs882.1 - BUY) H
1QFY12 net profit rose 17% YoY (5% QoQ) to Rs56.6bn (Rs17.4/share) -
inline with our estimates. Lower-than-expected depreciation (petchem,
E&P) and interest costs, and higher other income (cash balance +Rs34bn
QoQ to Rs485bn) boosted the bottom line. However core Ebitda (excluding
Rs1.37bn of forex gains) was flat QoQ at Rs98bn, as stronger refining
offset weaker petchem. With the SEZ refinery now liable for MAT
(minimum alternative tax), the effective tax rate rose 2.5ppt to 22% as
widely expected.
Refining boosted by higher throughput. Refining Ebit rose 28% QoQ -
better than we had expected - led by marginally higher refining margins
(US$10.3/bbl) and higher throughput (17mt, +2% QoQ). While we had
expected the uptrend in GRMs, we have been disappointed in the recent
past by Reliance’s inability to capture the strength in benchmark spreads
in realised margins. Management indicated lower light-heavy spreads,
product mix, higher solid-spread losses and greater usage of higher-cost
LNG as reasons.
Weak petchem. Petrochem Ebit fell 16% QoQ (much weaker than we
expected) on lower polymer and polyester intermediate spreads but also a
result of a higher proportion of lower-margin export sales, due to a 4-5%
YoY fall in domestic demand. We were impressed, though, that production
volume rose while inventory remained under control.
E&P remains a drag. E&P Ebit also fell 6% QoQ despite higher crude
prices, as lower gas production at PMT and KG-D6 weighed. Declining KGD6 gas volume (now c.39mmscmd in D1-D3) remains the key headwind
for Reliance. While approval of the BP deal paves the way for greater
cooperation in understanding the KG-D6 reservoir, our interactions during
the analyst meet indicate that drilling and completing additional wells
could take two to three years, implying that a rebound in production is
unlikely before 2013.
But expectations are low. This news may be largely factored into
consensus estimates, though, and the sensitivity of EPS to c.10mmscmd
lower volumes is also less crucial now at just c.4%. Importantly, E&Pvaluation expectations are also near five-year lows: for example, our own
valuation of Rs223/share is about Rs60 lower than that implied by the BP
transaction. Meanwhile, we are encouraged by progress in the shale-gas
ventures, where net output is now c.2-3mmscmd plus c.7-8kbpd of
condensate. After its 18% YTD correction, Reliance trades at a five-yearhigh 25% PE discount to the market Sensex and 8-20% lower than global
peers on March 12-13CL. We reiterate our BUY call.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RELIANCE INDUSTRIES
Five-year-high discount
Strong refining; weak petchem in 1Q. Maintain BUY.
but boosted by below-Ebitda items. Ebitda was flat QoQ: higher-thanexpected refining offset weaker petchem. BP deal approval should help
with the KG-D6 problems, but an output rebound will take two to three
years. Meanwhile the overseas shale ventures should gain scale and add
8-10% to Ebitda. With valuations attractive at a 25% PE discount to the
Sensex and an 8-20% discount to global peers, we maintain our BUY call.
Net profit up 5% in 1QFY12. Reliance’s (RIL IB H - Rs882.1 - BUY) H
1QFY12 net profit rose 17% YoY (5% QoQ) to Rs56.6bn (Rs17.4/share) -
inline with our estimates. Lower-than-expected depreciation (petchem,
E&P) and interest costs, and higher other income (cash balance +Rs34bn
QoQ to Rs485bn) boosted the bottom line. However core Ebitda (excluding
Rs1.37bn of forex gains) was flat QoQ at Rs98bn, as stronger refining
offset weaker petchem. With the SEZ refinery now liable for MAT
(minimum alternative tax), the effective tax rate rose 2.5ppt to 22% as
widely expected.
Refining boosted by higher throughput. Refining Ebit rose 28% QoQ -
better than we had expected - led by marginally higher refining margins
(US$10.3/bbl) and higher throughput (17mt, +2% QoQ). While we had
expected the uptrend in GRMs, we have been disappointed in the recent
past by Reliance’s inability to capture the strength in benchmark spreads
in realised margins. Management indicated lower light-heavy spreads,
product mix, higher solid-spread losses and greater usage of higher-cost
LNG as reasons.
Weak petchem. Petrochem Ebit fell 16% QoQ (much weaker than we
expected) on lower polymer and polyester intermediate spreads but also a
result of a higher proportion of lower-margin export sales, due to a 4-5%
YoY fall in domestic demand. We were impressed, though, that production
volume rose while inventory remained under control.
E&P remains a drag. E&P Ebit also fell 6% QoQ despite higher crude
prices, as lower gas production at PMT and KG-D6 weighed. Declining KGD6 gas volume (now c.39mmscmd in D1-D3) remains the key headwind
for Reliance. While approval of the BP deal paves the way for greater
cooperation in understanding the KG-D6 reservoir, our interactions during
the analyst meet indicate that drilling and completing additional wells
could take two to three years, implying that a rebound in production is
unlikely before 2013.
But expectations are low. This news may be largely factored into
consensus estimates, though, and the sensitivity of EPS to c.10mmscmd
lower volumes is also less crucial now at just c.4%. Importantly, E&Pvaluation expectations are also near five-year lows: for example, our own
valuation of Rs223/share is about Rs60 lower than that implied by the BP
transaction. Meanwhile, we are encouraged by progress in the shale-gas
ventures, where net output is now c.2-3mmscmd plus c.7-8kbpd of
condensate. After its 18% YTD correction, Reliance trades at a five-yearhigh 25% PE discount to the market Sensex and 8-20% lower than global
peers on March 12-13CL. We reiterate our BUY call.
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