Reliance Industries Ltd (Q1 FY12)
Revenues at Rs810bn, higher by 39% yoy; better than our estimates
- 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
|(Rs m)||Q1 FY12||Q1 FY11||% yoy||Q4 FY11||% qoq|
|OPM (%)||12.3||16.0||(379) bps||13.5||(129) bps|
|Effective tax rate (%)||22.1||19.7||19.5|
|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|
|Revenues (Rs mn)||Q1 FY12||Q1 FY11||% yoy||Q4 FY11||% qoq|
|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|
|Oil and gas||37.8||41.2||(335)||38.2||(40)|
|EBIT contribution (%)||Q1 FY12||Q1 FY11||bps yoy||Q4 FY11||bps qoq|
|Oil and gas||21.4||31.9||(1,057)||23.4||(201)|
|Revenue contribution (%)||Q1 FY12||Q1 FY11||bps yoy||Q4 FY11||bps qoq|
|Oil and gas||4.0||6.7||(269)||4.8||(77)|
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
- 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
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.
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
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