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Reliance Industries Ltd (Q1 FY12)

India Infoline Research Team / 17:17 , Jul 26, 2011

CMP Rs883, Target Rs1,091, Upside 23.6%

  • Revenues at Rs810bn, higher by 39% yoy; better than our estimates
  • OPM falls 379bps yoy driven by fall in EBIT margins of petrochemical segment and lower contribution of the oil and gas segment
  • GRMs were at US$10.3/bbl v/s our expectations of US$10.5/bbl
  • Higher cash balance and better yields have resulted in 49% yoy jump in other income
  • PAT at Rs56.6bn was in line with our expectations
  • In the near term, key earnings driver for RIL would be further strength in GRMs and recovery in petrochemical spreads
  • We maintain our BUY rating with a 9-month price target of Rs1,091
Result table
(Rs m) Q1 FY12 Q1 FY11 % yoy Q4 FY11 % qoq
Net sales 810,180 582,280 39.1 726,740 11.5
Material costs (653,400) (442,120) 47.8 (575,330) 13.6
Purchases (5,730) (4,740) 20.9 (2,410) 137.8
Personnel costs (8,780) (6,170) 42.3 (6,860) 28.0
Other overheads (43,010) (35,830) 20.0 (43,710) (1.6)
Operating profit 99,260 93,420 6.3 98,430 0.8
OPM (%) 12.3 16.0 (379) bps 13.5 (129) bps
Depreciation (31,950) (34,850) (8.3) (33,870) (5.7)
Interest (5,450) (5,410) 0.7 (6,960) (21.7)
Other income 10,780 7,220 49.3 9,170 17.6
PBT 72,640 60,380 20.3 66,770 8.8
Tax (16,030) (11,870) 35.0 (13,010) 23.2
Effective tax rate (%) 22.1 19.7
Reported PAT 56,610 48,510 16.7 53,760 5.3
PAT margin (%) 7.0 8.3 (134) bps 7.4 (41) bps
Ann. EPS (Rs) 69.2 59.3 16.6 65.7 5.3
Source: Company, India Infoline Research

Segmental performance
Revenues (Rs mn) Q1 FY12 Q1 FY11 % yoy Q4 FY11 % qoq
Petrochemical 183,660 139,030 32.1 181,940 0.9
Refining 736,890 505,310 45.8 627,040 17.5
Oil and gas 38,940 46,650 (16.5) 41,040 (5.1)
EBIT margins (%) Q1 FY12 Q1 FY11 bps yoy Q4 FY11 bps qoq
Petrochemical 12.1 14.8 (271) 14.4 (237)
Refining 4.3 4.0 31 4.0 34
Oil and gas 37.8 41.2 (335) 38.2 (40)
EBIT contribution (%) Q1 FY12 Q1 FY11 bps yoy Q4 FY11 bps qoq
Petrochemical 32.1 34.1 (200) 39.1 (699)
Refining 46.4 33.8 1,257 37.4 902
Oil and gas 21.4 31.9 (1,057) 23.4 (201)
Revenue contribution (%) Q1 FY12 Q1 FY11 bps yoy Q4 FY11 bps qoq
Petrochemical 19.1 20.1 (99) 21.4 (227)
Refining 76.6 73.0 360 73.6 299
Oil and gas 4.0 6.7 (269) 4.8 (77)
Source: Company, India Infoline Research

Refining segment

Reliance Industries Ltd (RIL) reported GRMs of US$10.3/bbl in Q1 FY12 as against US$9.2/bbl in Q4 FY11 and US$7.3/bbl Q1 FY11. The GRMs were tad lower than our estimates of US$10.5/bbl. During the quarter, RIL’s GRMs were 1.2x benchmark Singapore GRMs as against 2x in Q1 FY11. This was a despite a strong environment for GRMs. The company attributed the fall to the following 1) higher intake of imported LNG as availability of off-gases as well as KG-D6 gas decreased during the quarter, 2) widening spread of Brent over WTI and 3) lower prices of solid products such as Sulphur and Petcoke. The two refineries processed 17mn tons of crude as against 16.7mn tons in Q4 FY11 and 16.9mn tons in Q1 FY11. Revenue for the segment jumped 46% on yoy basis due to better realizations. EBIT margins for the segment were at 4.3% v/s 4% in Q1 FY11 on account of better GRMs.

Other highlights for the refining segment
  • RIL’s operating rate is currently back to 110%
  • Second CDU might undergo maintenance shutdown in H2 FY12
Outlook for GRMs and RIL
  • Recent upsurge in GRMs has been driven by 1) robust demand from the earthquake struck Japan, where about 14% of the refining capacity has been shut, 2) exports from Japan have reduced, 3) decent economic recovery in US and 4) strong regional demand for gasoil as China curtailed exports due to power generation issues.
  • While recovery in US is likely to sustain, re-construction activity in Japan will translate into strong demand for middle distillates keeping GRMs in the upward trajectory over the near term.
  • Over the next few years, significant capacity additions have been lined up, especially so in China and Middle East. Any delays in these capacity additions could provide some relief to the falling trend in margins.
  • The company will try to optimize netbacks by
    -  Maximize GRM by optimizing crude mix, operating costs and product mix
    -  Sweat refinery assets by maximizing operating capacities
    -  Continue to leverage combined operations to further improve efficiency and realize synergies from crude sourcing and product placement
    -  Widen feedstock flexibility and product slate through hardware modifications

Petrochemical segment

During Q1 FY12, petrochemical segment revenues rose by 32% yoy. The growth was primarily on account of higher volumes. Realizations remained flat on yoy basis but fell sequentially as domestic demand scenario weakened in the quarter. EBIT margins for the segment fell 271bps yoy and 237bps qoq. The fall was due to fall in polymer deltas as the demand – supply balance remains in favor of supply with strong capacity adds in the Middle East. Furthermore, the chemical chain, which was witnessing a robust trend until Q4 FY11, witnessed some pressure during the quarter.

Outlook for petrochemical segment

Following strong recovery in demand from India and China product prices have witnessed a substantial rise. However, capacity addition is expected to surpass incremental demand in the near term. The new capacities are based on low cost gas, which will further put pressure on margins. Closure of select plants in Japan and Europe would provide some support to the falling spreads. The polyester chain would continue to be better off with prevailing high prices of cotton on back of declining acreage in domestic market. Integrated players such as RIL would continue to post a relatively better performance.

E&P segment

Uncertainty has emerged over the future quantity of gas production at KG-D6 field over the past few months. The current level of production is about 50mmscmd as against peak rate achieved of about 60mmscmd. For the next couple of years we are forecasting the production to be at 50mmscmd and 52mmscmd. In case that level extends for another couple of years, our NPV value will be trimmed by Rs10/share. Bureaucratic issues could further impact the sentiment. On the international asset front though, things are going as per schedule with regards to the three shale gas ventures.

Production at the Panna-Mukta fields are back to the previous year levels but Tapti field continues to witness natural decline.

Other highlights for the E&P segment

  • During the quarter, total gas production was 156bcf (JV Share) in comparison to 192bcf in Q1 FY11 and 162bcf in Q4 FY11

  • During the quarter, crude oil production was 1.4mn barrels (JV share) as against 2.4mn barrels in Q1 FY11 and 1.5mn barrels in Q4 FY11

Update on shale gas assets

Chevron JV (prior Atlas JV)

  • 3 horizontal rigs and 1 Frac crew in operation

  • 22 producing wells with gross exit production rate ~ 51 MMscfd at JV level

  • RIL’s share of production at ~1.6Bcfe in Q1 FY12

  • The company has a conservative drilling schedule and is ramping up cautiously in view of the prevailing gas price environment and availability of take-away capacity

  • US$82mn of additional capex (incl. carry) in Q1 FY12; cumulative investment of over US$689mn till date

Carrizo JV

  • Continuous 2 rig drilling program in Northeast PA

  • Pipeline construction progressing to support first sales

  • Initial 10 well program in C-Counties commencing in Sept ’11

  • US$32mn of additional capex (incl. carry) during Q1 FY12; Cumulative investment of over US$402mn

Pioneer JV

  • 2 additional rigs mobilized during the quarter; 12 rigs currently in operation 70 wells drilled so far with addition of 20 wells during Q1 FY12

  • 42 wells producing currently; 18 wells put on production during Q1 FY12

  • Gross JV exit production rate ~165 MMscfepd, including ~13,800 Bpd of condensate

  • Reliance’s share of production at ~5.05 Bcfe in Q1 FY12

  • Midstream JV progressing on plan – 5 CGPs commissioned, with the 6th expected soon

  • Additional capex of US$286mn in Q1 FY12; cumulative investment of over US$1,074mn till date in both upstream and midstream JV  

Higher available cash balance drives up other income

For Q1 FY12, RIL reported 20.3% yoy jump in PBT as compared to 6.3% yoy rise in operating profit. The performance was better at the PBT level on account of 49% yoy jump in other income as cash balance was at Rs458bn at end of Q1 FY12 as compared to Rs264bn at end of Q1 FY11. Additionally, higher interest rates have resulted in better yields.

Deployment of cash and developments on E&P assets will be keenly watched

Going ahead, while refining segment will witness a stronger environment, petchem segment will see pressure on spreads in the near term. For RIL, as complex nature of its refinery will allow it to gain further, integrated nature of its petrochemical operations will lead to a relative better performance. Utilization of Rs458bn worth of cash on the balance sheet would be keenly watched. With the company in consultation with the government on key issues with respect to their E&P portfolio, any positive development would provide additional kicker. We maintain BUY with a 9-month price target of Rs1,175.

Financial summary
Y/e 31 Mar (Rs bn) FY10 FY11 FY12E FY13E
Revenues 2,037,397 2,658,106 2,816,149 2,878,529
yoy growth (%) 34.7 30.5 5.9 2.2
Operating profit 308,939 380,436 419,153 436,994
OPM (%) 15.2 14.3 14.9 15.2
Pre-exceptional PAT 158,976 192,937 226,923 239,476
Reported PAT 245,032 192,937 226,923 239,476
yoy growth (%) 63.7 (21.3) 17.6 5.5

EPS (Rs) 53.4 64.7 69.3 73.1
P/E (x) 16.4 13.5 12.6 12.0
Price/Book (x) 1.8 1.7 1.6 1.5
EV/EBITDA (x) 10.1 8.3 7.2 6.5
Debt/Equity (x) 0.5 0.5 0.5 0.4
RoE (%) 12.1 13.1 13.8 13.0
RoCE (%) 10.4 11.3 12.1 11.9
Source: Company, India Infoline Research