Reliance Industries (Q2 FY14)

India Infoline News Service | Mumbai |

Revenues at Rs1,037bn, higher by 14.9% yoy driven by strong growth in both refining and petrochemical segments aided by weak rupee

CMP Rs870, Target Rs950, Upside 9.2%

  • Revenues at Rs1,037bn, higher by 14.9% yoy driven by strong growth in both refining and petrochemical segments aided by weak rupee
  • OPM falls by 104bps yoy and 51bps qoq; fall was led by decline in EBIT margins of the refining segment and lower contribution of E&P business
  • GRMs were at US$7.7/bbl in line with our expectations, were down qoq on the back of fall in gasoline and fuel oil spreads
  • Shale gas revenues and EBIDTA sees first sequential decline
  • PAT at Rs54.9bn was tad better than our estimates owing to better than expected operational performance
  • We maintain our Market Performer rating and 9-month price target of Rs950 per share
Result table
(Rs m) Q2 FY14 Q2 FY13 % yoy Q1 FY14 % qoq
Net sales 1,037,580 903,360 14.9 876,450 18.4
Material costs (881,800) (759,060) 16.2 (729,830) 20.8
Purchases (1,160) (540) 114.8 (3,920) (70.4)
Personnel costs (8,080) (8,480) (4.7) (8,990) (10.1)
Other overheads (68,050) (57,510) 18.3 (62,960) 8.1
Operating profit 78,490 77,770 0.9 70,750 10.9
OPM (%) 7.6 8.6 (104) bps 8.1 (51) bps
Depreciation (22,330) (23,060) (3.2) (21,380) 4.4
Interest (8,050) (7,370) 9.2 (8,100) (0.6)
Other income 20,600 21,120 (2.5) 25,350 (18.7)
PBT 68,710 68,460 0.4 66,620 3.1
Tax (13,810) (14,370) (3.9) (13,100) 5.4
Effective tax rate (%) 20.1 21.0
Reported PAT 54,900 54,090 1.5 53,520 2.6
PAT margin (%) 5.3 6.0 (70) bps 6.1 (82) bps
Ann. EPS (Rs) 68.0 66.9   1.7 66.3   2.5
Source: Company, India Infoline Research

Segmental performance
Revenues (Rs mn) Q2 FY14 Q2 FY13 % yoy Q1 FY14 % qoq
Petrochemical 248,920 220,580 12.8 219,500 13.4
Refining 974,560 838,780 16.2 814,580 19.6
Oil and gas 14,640 22,540 (35.0) 14,540 0.7
EBIT margins (%) Q2 FY14 Q2 FY13 bps yoy Q1 FY14 bps qoq
Petrochemical 10.1 7.9 217 8.6 146
Refining 3.3 4.2 (94) 3.6 (37)
Oil and gas 24.3 38.4 (1,410) 24.2 11
Revenue contribution (%) Q2 FY14 Q2 FY13 bps yoy Q1 FY14 bps qoq
Petrochemical 20.1 20.4 (31) 20.8 (76)
Refining 78.5 77.4 110 77.2 128
Oil and gas 1.2 2.1 (90) 1.4 (20)
EBIT contribution (%) Q2 FY14 Q2 FY13 bps yoy Q1 FY14 bps qoq
Petrochemical 41.2 28.1 1,315 35.8 542
Refining 52.2 56.8 (458) 55.9 (370)
Oil and gas 5.9 14.0 (811) 6.7 (81)
Source: Company, India Infoline Research

E&P segment
KG-D6 gas production continued to decline with Q2 FY14 average of 14.3mmscmd a fall of 51% yoy and 8% qoq. While gas production at the Panna-Mukta field was lower by 6.6% yoy, oil production was down 18.2% yoy. Gas production at the Tapti field also declined by 41.8% yoy. Lower volumes translated into 35% yoy slump in the revenues from the segment. The fall would have been steeper had it not been for steep rupee depreciation. EBIT margins for the segment plummeted by 1,410bps yoy to 24.3% owing to operational de-leverage. Going ahead, the company has planned to arrest the decline in production but awaits key approvals from the government including budget approvals for capital expenditure.

Key developments in KG-D6 field

Next wave to target undeveloped resources in KG-D6
  • D-34 gas discovery made in 2007
  • Two gas bearing zones
FDP submitted in Jan’13 approved by MC of KG-D6 block in Aug’13
Field Development Plan Synopsis :
Estimated reserves approx. 1.2-1.4 TCF of gas
  • Gas production rate up to 12 MMSCMD, first gas expected in 4 years
  • 8 development wells through dedicated evacuation pipelines to the existing CRP associated with the D1-D3 gas fields
  • Estimated capex for above facility is US$3.2bn excluding taxes/duties
  • Existing facilities downstream of the CRP will be utilized for transportation and handling of R-Cluster well fluid
  • FEED completed
Update in other E&P blocks
  • KG-D6: MJ gas discovery - ~155m of gross pay: flowed at 31mmscfd and 2,121 bopd, Drilling of 2 appraisal wells planned, Drilling of appraisal well MJ-A1 has commenced
  • CY-25: Second discovery made in the block, ~143m of gross pay, flowed at 35.2mmscfd and 413bopd; Appraisal program under preparation; further exploratory prospects under consideration
  • CBM: Contracting process for development activities is at an advanced stage, early activities progressing on Shadol Phulpur Gas pipeline by Reliance Gas Pipelines Ltd, Gas pricing formula submitted for approval
Update on shale gas assets

  • For Q2 FY14, RIL’s revenues and EBIDTA from shale gas business were at US$193mn and US$127mn
  • Revenues and EBIDTA declined qoq as volume ramp up was impacted by delayed well hookups to PAD drilling, high level of shut-in wells for offsetting frac activity and down spacing tests in Pioneer JV. For Q3 FY14 these issues have been resolved and production is expected to rise
  • Reliance share of net volumes at 31.2 Bcfe
  • Average realization was higher at US$6.19/Mcfe in Q2 FY14 vs US$6.03/Mcfe in Q2 FY13
  • Capex for the quarter was at US$423mn taking the cumulative investments to US$6.5bn across all JVs
Refining segment
RIL reported GRMs of US$7.7/bbl in Q2 FY14 as against US$9.5/bbl in Q2 FY13 and US$8.4/bbl in Q1 FY14. The GRMs were in line with our estimates. The sequential decline in GRM was on the back of weakness in light distillate spreads, lower fuel oil cracks and correction in Brent-WTI differential. Gasoline, Jet Kero and fuel oil contributed to the bulk of the sequential decline. Gasoline cracks weakened with the end of driving season in US while additional weakness creped in Asia amid ample supplies and reduced demand from key importers Indonesia and Malaysia.

Apart from having 1) high complexity of operations, 2) world class logistics infrastructure, 3) strategic location, 4) global reach with product storages at key destinations and 5) flexibility to alter the product slate and adapt to changing market dynamics, RIL is advantaged with its efficient sourcing of crude. During the quarter the company procured four new value adding crude oil varieties.

The two refineries processed 17.7mn tons of crude as against 17.6mn tons in Q2 FY13 and 17.1mn tons in Q1 FY14. Revenue for the segment was higher by 16.2% yoy owing to higher throughput, higher product prices and rupee depreciation. EBIT margins for the segment at 3.2% were lower by 94bps yoy and 37bps qoq but were better than estimates on above estimates throughput.

Update on Petcoke gasification project
  • Procurement of equipment nearly complete
  • Engineering work underway and construction has commenced
  • On completion the project is expected to add US$2.5/bbl to GRMs
Outlook for GRMs
  • Demand outlook continues to be cautious but is showing early signs of improvement, especially so in China and US. Recent data from Europe has been encouraging as well. IEA estimates about 1mb/d addition to demand every year over the next three years driven by rising demand from emerging economies.
  • On the supply side, capacity additions are expected to keep up pace with incremental demand. However, closures of refiners in Europe and stress on teapot refineries in China will keep a check on supply additions. Middle East is expected to emerge as a major product exporter.
  • For RIL, we expect GRMs to remain flat over FY14 and FY15 at US$9/bbl.
Petrochemical segment
During Q2 FY14, petrochemical segment revenues were up 12.8% yoy and
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