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Reliance Industries (RIL IN)
N: Results in line, flat quarters ahead
1QFY12 results in line but moderate deceleration in
domestic demand for petrochemical products during the
quarter mildly disappointing
While the rate of decline of gas production seems slowing a
bit, there is still no consensus between RIL and upstream
regulator on future action to arrest production decline
We rate RIL Neutral with a TP of INR1,040
RIL reported net profit of INR56.6bn (+17%yoy, 5.3%qoq) broadly in line with our
and consensus estimates. While there were sequential decline of 16% and 6% in the EBIT
of petrochemical and upstream segments, refining segment grew by 28% riding on
refining margin of USD10.3/barrel. However, RIL’s premium over the regional
Singapore-Dubai complex margin has narrowed down to USD1.71/barrel from
USD1.84/barrel a quarter ago and USD3.6/barrel a year ago.
Flat quarters ahead. The petrochemical demand in India declined c5% y-o-y during
1QFY12. This in our view is disappointing considering India is a growing economy and
petrochemical products typically have high correlation with GDP growth. We also believe
that in the absence of any concrete measure, the gas production would continue its decline
though the rate of decline in 1QFY12 was lower than that in 4QFY11. We also believe
that the current refining margins broadly reflect demand-supply equilibrium, hence do not
expect refining margins to be materially different going forward for next few quarters.
Therefore, we anticipate several flat quarters ahead till the new petrochemical capacities
come on-stream over next 18-36 months.
Cash deployment remains a concern. While company has lined up new projects like offgas
cracker, petcoke gasification and broadband business, there is still no clarity on rollout
plan for these projects. Therefore, concern on deployment of cash would continue to be an
overhang on the stock. RIL already has a cash balance of USD10.2 bn.
Valuation and risks: Our target price is based on a sum of the parts. We value the E&P
business on a DCF basis for producing properties, on reserve multiples for discovered
fields, on the average of EV/EBITDA and PE for the refining & petrochemical business
and investments at book value. There could be upside and downside risk to our estimates
if the refining and petrochemical margins, production ramp-up from the D6 block and
INR rates are different from our assumptions. A USD1/barrel change in refining margin
would change our target price by INR70/share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RIL IN)
N: Results in line, flat quarters ahead
1QFY12 results in line but moderate deceleration in
domestic demand for petrochemical products during the
quarter mildly disappointing
While the rate of decline of gas production seems slowing a
bit, there is still no consensus between RIL and upstream
regulator on future action to arrest production decline
We rate RIL Neutral with a TP of INR1,040
RIL reported net profit of INR56.6bn (+17%yoy, 5.3%qoq) broadly in line with our
and consensus estimates. While there were sequential decline of 16% and 6% in the EBIT
of petrochemical and upstream segments, refining segment grew by 28% riding on
refining margin of USD10.3/barrel. However, RIL’s premium over the regional
Singapore-Dubai complex margin has narrowed down to USD1.71/barrel from
USD1.84/barrel a quarter ago and USD3.6/barrel a year ago.
Flat quarters ahead. The petrochemical demand in India declined c5% y-o-y during
1QFY12. This in our view is disappointing considering India is a growing economy and
petrochemical products typically have high correlation with GDP growth. We also believe
that in the absence of any concrete measure, the gas production would continue its decline
though the rate of decline in 1QFY12 was lower than that in 4QFY11. We also believe
that the current refining margins broadly reflect demand-supply equilibrium, hence do not
expect refining margins to be materially different going forward for next few quarters.
Therefore, we anticipate several flat quarters ahead till the new petrochemical capacities
come on-stream over next 18-36 months.
Cash deployment remains a concern. While company has lined up new projects like offgas
cracker, petcoke gasification and broadband business, there is still no clarity on rollout
plan for these projects. Therefore, concern on deployment of cash would continue to be an
overhang on the stock. RIL already has a cash balance of USD10.2 bn.
Valuation and risks: Our target price is based on a sum of the parts. We value the E&P
business on a DCF basis for producing properties, on reserve multiples for discovered
fields, on the average of EV/EBITDA and PE for the refining & petrochemical business
and investments at book value. There could be upside and downside risk to our estimates
if the refining and petrochemical margins, production ramp-up from the D6 block and
INR rates are different from our assumptions. A USD1/barrel change in refining margin
would change our target price by INR70/share.
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