Reliance Industries (Q3 FY14)

India Infoline News Service | Mumbai |

Revenues at Rs1,035bn, higher by 10.3% yoy driven by strong growth in both refining and petrochemical segments aided by weak rupee

CMP Rs868, Target Rs1,027, Upside 18.3%

  • Revenues at Rs1,035bn, higher by 10.3% yoy driven by strong growth in both refining and petrochemical segments aided by weak rupee
  • OPM falls by 156bps yoy and 20bps qoq; fall was led by decline in EBIT margins of the refining segment and lower contribution of E&P business
  • GRMs were at US$7.6/bbl tad better than our expectations, were flat qoq but spread v/s Singapore GRM improved
  • Shale gas revenues and EBIDTA recover post sequential decline in Q2 FY14
  • PAT at Rs55.1bn was better than our and street estimates owing to better than expected operational performance in E&P segment and higher other income
  • We maintain our BUY rating and 9-month price target of Rs1,027

Result table
(Rs m) Q3 FY14 Q3 FY13 % yoy Q2 FY14 % qoq
Net sales 1,035,210 938,860 10.3 1,037,580 (0.2)
Material costs (887,030) (789,400) 12.4 (881,800) 0.6
Purchases (30) (630) (95.2) (1,160) (97.4)
Personnel costs (7,150) (8,630) (17.1) (8,080) (11.5)
Other overheads (64,780) (56,470) 14.7 (68,050) (4.8)
Operating profit 76,220 83,730 (9.0) 78,490 (2.9)
OPM (%) 7.4 8.9 (156) bps 7.6 (20) bps
Depreciation (21,430) (24,570) (12.8) (22,330) (4.0)
Interest (7,920) (8,060) (1.7) (8,050) (1.6)
Other income 23,050 17,400 32.5 20,600 11.9
PBT 69,920 68,500 2.1 68,710 1.8
Tax (14,810) (13,480) 9.9 (13,810) 7.2
Effective tax rate (%) 21.2 19.7
20.1
Reported PAT 55,110 55,020 0.2 54,900 0.4
PAT margin (%) 5.3 5.9 (54) bps 5.3 3 bps
Ann. EPS (Rs) 68.2 68.2   0.1 68.0   0.4
Source: Company, India Infoline Research

Segmental performance
Revenues (Rs mn) Q3 FY14 Q3 FY13 % yoy Q2 FY14 % qoq
Petrochemical 252,800 220,530 14.6 248,920 1.6
Refining 954,320 866,410 10.1 974,560 (2.1)
Oil and gas 17,330 19,210 (9.8) 14,640 18.4
EBIT margins (%) Q3 FY14 Q3 FY13 bps yoy Q2 FY14 bps qoq
Petrochemical 8.4 8.8 (38) 10.1 (166)
Refining 3.3 4.2 (88) 3.3 3
Oil and gas 31.2 30.7 45 24.3 684
Revenue contribution (%) Q3 FY14 Q3 FY13 bps yoy Q2 FY14 bps qoq
Petrochemical 20.6 19.9 71 20.1 56
Refining 77.8 78.2 (40) 78.5 (70)
Oil and gas 1.4 1.7 (32) 1.2 23
EBIT contribution (%) Q3 FY14 Q3 FY13 bps yoy Q2 FY14 bps qoq
Petrochemical 36.0 31.1 486 41.2 (521)
Refining 53.2 58.1 (488) 52.2 101
Oil and gas 9.2 9.5 (33) 5.9 329
Source: Company, India Infoline Research

E&P segment: springs a surprise
KG-D6 gas production continued to decline with Q3 FY14 average of 12.7mmscmd a fall of 48% yoy and 11% qoq. Both crude oil and natural gas production at Panna-Mukta fields was flat on yoy basis but saw a sequential improvement of 16.7% and 1.2% respectively. This was owing to commencement of production from Panna – L area of the field boosted by start of production from the infill wells. While revenues from the segment were down 9.8% yoy they jumped 18.4% on sequential basis on higher production. EBIT margins for the segment were flat on a yoy basis but surge 684bps on a sequential basis. The EBIT margins were much higher than our and street estimates. 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 E&P
  • D26 (MA)
  • Drilling of development well MA8H completed and put to production in Jan 2014
  • Current plan for incremental production rate of ~2.5mmscmd  of gas - based on well performance
  • Planning and readiness for MA6H side track to enhance gas recovery
  • Appraisal of D55 discovery
  • Drilling of first appraisal well for MJ-A1 in progress - to be completed by end Feb 2014
  • Planning for second appraisal well underway
  • D1-D3 field
  • First campaign of water shut off jobs to enhance recovery has commenced - Well A2A plug job underway. Planning underway for second campaign to begin by Q1 FY15
  • Engineering and construction work underway for OT booster compressor
  • R-Cluster development
  • RFQs for major long leads issued. Investment decisions subject to key approvals
  • Mukta-B Development: Development plan approved by MC in Dec 2013. Estimated net sales reserves ~3.42 MMBL of oil & 7.72 BCF of gas till PSC period. First oil expected in FY16.
  • CBM: Targeting first gas by FY16 and in Phase – I development company envisages drilling and completion of 229 wells. While land acquisition for the first phase is ongoing engineering for surface facilities in progress and procurement is nearing completion stage.  

Update on shale gas assets

  • For Q3 FY14, RIL’s revenues and EBIDTA from shale gas business were at US$221mn and US$173mn
  • Revenues and EBIDTA surged qoq as volumes increased at Pioneer and Chevron JVs while midstream constraint got resolved in Carrizo.
  • Reliance share of net volumes at 36.6 Bcfe
  • Average realization was lower at US$6.03/Mcfe in Q3 FY14 vs US$6.27/Mcfe in Q3 FY13
  • Capex for the quarter was at US$374mn taking the cumulative investments to over US$6.8bn across all JVs

Refining segment: in-line performance
RIL reported GRMs of US$7.6/bbl in Q3 FY14 as against US$9.6/bbl in Q3 FY13 and US$7.7/bbl in Q2 FY14. The GRMs were tad above our estimates. GRMs outperformed benchmark Singapore GRMs and the spread increased from ~US$2.3/bbl in Q2 FY14 to ~US$3.1/bbl in Q3 FY14. The main reasons attributable to this were
  1. RIL’s diversified crude sourcing and grade switching flexibility enabled it to benefit from reduction in the Brent-Dubai differentials during the quarter
  2. Weak FO supported RIL margin as proportion of FO in RIL’s basket is nil
  3. Seasonal impact of weak gasoline cracks partially offset by marginal uptick in middle distillate cracks
  4. Strong naphtha cracks on the back of good petrochemicals demand had positive impact

The two refineries processed 17mn tons of crude as against 17.5mn tons in Q3 FY13 and 17.7mn tons in Q2 FY14. Throughput was lower on account of maintenance turnaround. Revenue for the segment was higher by 10.1% yoy owing to higher product prices and rupee depreciation. EBIT margins for the segment at 3.3% were lower by 88bps yoy but were flat sequentially.

Update on Petcoke gasification project
  • Construction started on site; pet coke storage dome in gasification complex nearing completion
  • Procurement orders for long lead items completed
  • 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 improved gradually remain flat over FY14-16.

Petrochemical segment
During Q3 FY14, petrochemical segment revenues were up 14.6% yoy and 1.6% qoq. Yoy growth was driven
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