Reliance Industries BUY RESULTS REVIEW 2QFY16 19 OCT Key highlights. CMP (as on 16 Oct 2015) Rs 912 Target Price Rs 1,100

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1 INDUSTRY OIL & GAS CMP (as on 16 Oct 2015) Rs 912 Target Price Rs 1,100 Nifty 8,238 Sensex 27,215 KEY STOCK DATA Bloomberg/Reuters RIL IN/RELI.BO No. of Shares (mn) 3,238 MCap (Rs bn) / ($ mn) 2,954/45,540 6m avg traded value (Rs mn) 3,714 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,068/796 3M 6M 12M Absolute (%) (10.9) (1.7) (2.0) Relative (%) (6.6) 3.3 (6.7) SHAREHOLDING PATTERN (%) Promoters FIs & Local MFs FIIs Public & Others Source : BSE Satish Mishra satish.mishra@hdfcsec.com Deepak Kolhe deepak.kolhe@hdfcsec.com Core growth intact, telecom the spoiler? RIL beat market expectations with its 2Q results, mainly driven by strong GRM and petchem margins. RIL again proved its ability to tweak crude mix and product slate. RIL's GRM grew to US$ 10.6/bbl (+2% QoQ) despite the fall in Singapore GRM (-17%). Standalone EBITDA increased to Rs 98bn (+19% YoY). Lower other income (lower cash accruals) partly offset the growth and PAT stood at Rs 66bn (+14%). While crude prices fell by 51% YoY, petchem prices saw a drop of just 20-30%. On the other hand, Singapore GRM in 1HFY16 was up 36%. We believe refining and petchem margins have peaked and expect sequential decline to start soon. Our positive stance on RIL is based on the US$ 17bn capex in the refining and chemicals business. About 70% of the capex benefits will come in FY17 (boosting EBITDA by 42% over FY15) and the rest in FY18. RIL, with its superior operational capabilities, will sail through any near term downturn. Our SOTP target is Rs 1,100/sh based on FY17E. Maintain BUY. RESULTS REVIEW 2QFY16 19 OCT 2015 Reliance Industries BUY Key highlights Refining: GRM increased to US$ 10.6/bbl (+$ 0.2 QoQ). Strong gasoline margins ($ 19.4/bbl) and favourable crude mix negated the weakness in margins of gasoil ($ 10.8/bbl, -22%). RIL's premium over Singapore GRM widened to $ 4.3 vs. 2.4/bbl. Petchem: RIL reported PBIT of Rs 25bn (+5% YoY) with strong margins in PE (~33% above 5-year average) and PP (~50% higher). E&P India: Lower volumes and realisations led to a PBIT of Rs 560mn (-83% YoY). Gas volumes from KG-D6 were flat QoQ at 11.4 mmscmd. Retail: Revenue for the quarter grew to Rs 51bn (+23% YoY) and EBITDA by 13% (Rs 2.1bn). The business should register a CAGR of ~20%. Key risk - rising investments in telecom: With plans to invest about US$ 16bn in telecom, R-Jio will launch services by early It is difficult to ascertain returns on these investments. Financial Summary (Standalone) (Rs bn) 2QFY16 2QFY15 YoY(%) 1QFY16 QoQ (%) FY15 FY16E FY17E FY18E Net Sales (37.0) (7.6) 3, , , , EBITDA PAT Diluted EPS (Rs) P/E (x) EV / EBITDA (x) RoE (%) HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

2 E&P business KG-D6 KG-D6 gas volume stood at 11.4 mmscmd (flat QoQ, -11% YoY), while oil volume came in at 0.4 mmbbl (-11% QoQ, -22%YoY). Production decline was arrested in D1-D3 through additional wells. Appraisal activities are currently underway in D55. PMT Gas volume was 17.8 BCF (-4% QoQ, -13% YoY). Oil volume was 1.9 mmbbl (-19% QoQ, +1% YoY). Poor performance and sharp decline in reserves continued in the Tapti fields. CBM Phase-1 activities are near completion. Gas production is likely to start in 3QFY16. Shale Gas Average realisation declined by 20% QoQ and 51% YoY. Volumes were strong at 51 BCFe (+3% QoQ). Capex in Q2 was US$ 209mn. Company is focusing on reducing capex and opex. Co provided an impairment of Rs 27bn factoring lower prices. 3QFY15 4QFY15 1QFY16 2QFY16 Production (BCFe) Avg Realisation (US$/mcfe) Gas price (US$/mmbtu) Revenues ($ mn) EBITDA ($ mn) Refining business Throughput was 17.1 mnt (+3% QoQ, operating at 110% utilisation). GRM increased to US$ 10.6/bbl (+$ 0.2 QoQ), which resulted in highest segment PBIT of Rs 54.1bn (+5% QoQ, +43% YoY). Margins were strong for gasoline at US$ 19.4/bbl. For all other products, margins were weak QoQ (gasoil -US$ 3.0/bbl, jet/sko -2.6, fuel oil -4.1, naphtha -0.7). However, RIL did well with its flexibility to switch product mix and crude mix. Premium over Singapore complex margins increased to US$ 4.3/bbl vs. 2.4 QoQ. Petcoke gasification project is expected to be commissioned phase-wise from Mar-16. The company maintains its guidance of additional GRM of US$ 2.5/bbl by replacing LNG with coke. Petchem & Fibres Polymer: Margins for PP and PE were above the 5-year average, led by lag effect (lower fall in product prices vs. RM) and strong demand. Domestic demand for polymers should rise with improving economy and lower prices. Polyester: Margins remained under pressure owing to weak demand. Retail The business has turned PAT positive and achieved critical mass to gain from operating leverage. 2QFY16 revenues were Rs 51bn (+8% QoQ, +23% YoY) and EBIDTA was Rs 2.1bn (+13% YoY). RIL added 110 stores in Q2 (total of 2,857). Page 2

3 Higher EBITDA was led by strong GRM (+2% QoQ) despite the fall in Singapore GRM by 17% Quarterly Financials Snapshot (Standalone) (Rs bn) 2QFY16 2QFY15 YoY(%) 1QFY15 QoQ (%) 1HFY16 1HFY15 Revenues (37.0) (7.6) 1, , Material Expenses (46.2) (11.0) , Employee Expenses (22.8) Other Operating Expenses (4.5) EBIDTA Depreciation Other Income (24.4) (11.1) PBIT Interest Cost (8.4) PBT Tax (6.3) APAT EPS Margin Analysis 2QFY16 2QFY15 YoY(bps) 1QFY15 QoQ (bps) 1HFY16 1HFY15 Material Expenses as % of Net Sales (1,211) 73.5 (268) Employee Expenses as % of Net Sales (31) Other Expenses as % of Net Sales EBITDA Margin (%) Net Profit Margin (%) Tax Rate (%) (56) 23.5 (179) Page 3

4 7-year high GRM of US$ 10.6/bbl Change in estimates led by 1) Lower crude prices 2) Weaker INR vs. US$ 3) Higher GRM for FY16E Quarterly Segmental Snapshot (Standalone) (Rs mn) 2QFY16 2QFY15 YoY(%) 1QFY15 QoQ (%) 1HFY16 1HFY15 Segmental Revenues Petrochemicals (20.4) Refining (44.1) (16.4) 1, , E & P (15.5) (2.8) Gross Revenues , (38.7) (11.8) 1, , Segmental PBIT Petrochemicals Refining E & P (83.1) 0.83 (32.5) Total PBIT Margins (%) Petrochemicals Refining E & P (1,926) 6.9 (211) Change In Estimates (Rs bn) FY16 Old FY16 New % ch FY17 Old FY17 New % ch Revenue 3, , (4.0) 3, , (5.4) EBITDA PAT EPS (Rs/sh) Peer Valuations CMP Mcap TP EPS (Rs/sh) P/E (x) P/BV (x) ROE (%) Rating (Rs/sh) (Rs bn) (Rs/sh ) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E ONGC 264 2,260 BUY RIL 912 2,952 BUY 1, GAIL NEU IGL BUY Petronet LNG* SELL BPCL NEU HPCL BUY IOC BUY , * Consolidated Page 4

5 Benefits from off-gas cracker and petcoke gasification will come in phases from FY17E Decline in KG-D6 gas volumes has been arrested Polyester, polymers and intermediates capacity will come in phases Assumptions FY12 FY13 FY14 FY15 FY16E FY17E FY18E Crude price (USD/bbl) INR-USD Refining business GRM (USD/bbl) Crude throughput (mmt) Upstream business PMT Gas (BCF) Oil (mmbbl) PM Gas price (USD/mmbtu) Tapti Gas price (USD/mmbtu) KG Gas (mmscmd) Gas price (USD/mmbtu) Petrochemicals Sales volume (mmt) SOTP Valuation (Based On FY17E) Business EBITDA (Rs bn) Multiple Value (Rs bn) Value* (Rs/sh) Valuation Basis Petrochemicals , EV/EBITDA on FY17E Refining , EV/EBITDA on FY17E E & P PMT EV/EBIDTA on FY17E KG D6 gas NPV based on DCF NEC NPV based on DCF CBM 18 6 NPV based on DCF Investment (US$ bn) Shale gas x Inv as at Sep-15 Retail x Inv as at Sep-15 Telecom (R-Jio) x Inv as on Sep-15 CWIP x as on Mar-17 Consolidated Net Debt 1.0 (955) (327) x Inv as on Sep-15 Value per share 1,100, * Valuation is based on bn shares (net of treasury shares) Page 5

6 Standalone Income Statement (Rs bn) FY14 FY15 FY16E FY17E FY18E Revenues 3, , , , , Growth % 8.3 (15.6) Raw material 3, , , , , Employee cost Other expenses EBITDA EBIDTA margin (%) EBITDA growth % Depreciation Other income EBIT Finance charges PBT Provision for taxes PAT EPS EPS Growth % Standalone Balance Sheet (Rs bn) FY14 FY15 FY16E FY17E FY18E SOURCES OF FUNDS Share Capital Reserves and surplus 1, , , , , Total Equity 1, , , , , Short Term debt Long Term debt Total Debt , , Deferred tax liability Long term provision TOTAL SOURCES OF FUNDS 2, , , , , APPLICATION OF FUNDS Net fixed assets , , Intangible assets Capital WIP Intangibles WIP Long-term Loans and Advances Investments Inventories Debtors Cash and Cash equivalent ST Loans and Advances Other Current Assets Total Current Assets 1, , , , , Creditors Other Current Liabilities Provisions Total Current Liabilities Net Current Assets TOTAL APPLICATION OF FUNDS 2, , , , , Page 6

7 Standalone Cash Flow (Rs bn) FY14 FY15 FY16E FY17E FY18E Reported PAT Other income (net of tax) (89.31) (87.15) (84.98) (93.28) (114.35) PAT FROM OPERATIONS Depreciation Interest Working capital change (49.10) (37.85) OPERATING CASH FLOW Capex (310.47) (476.82) (429.00) (297.00) (132.00) Free Cash Flow to Firm (109.09) (68.25) (186.19) Investments (169.68) (48.58) (60.00) (60.00) (60.00) Other income (net of tax) INVESTING CASH FLOW (390.84) (438.25) (404.02) (263.72) (77.65) Capital issuance Debt issuance (10.00) (200.00) Interest (32.06) (23.67) (25.86) (27.42) (24.57) Dividend (30.92) (32.68) (41.08) (50.86) (56.72) FINANCING CASH FLOW (19.75) (88.28) (281.30) NET CASH FLOW (49.43) (103.15) Closing cash Standalone Key Ratios FY14 FY15 FY16E FY17E FY18E PROFITABILITY % EBITDA Margin EBIT Margin APAT Margin RoE Core RoCE RoCE EFFICIENCY Tax rate % Total Asset turnover (x) Inventory (days) Debtor (days) Payables (days) Cash conversion cycle (days) (4) (15) (10) (10) (10) Net Debt/EBITDA (x) Net D/E Interest coverage PER SHARE DATA EPS (Rs) CEPS (Rs) DPS (Rs) BV (Rs) VALUATION P/E (x) P/Cash EPS (x) P/BV (x) EV/EBITDA (x) EV/Revenue (x) Dividend Yield (%) CFO/EV (%) FCFF/EV (%) (3.5) (2.1) (5.4) FCFE/M Cap (%) 5.7 (1.9) (2.9) Page 7

8 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 RELIANCE INDUSTRIES : RESULTS REVIEW 2QFY16 RECOMMENDATION HISTORY Reliance Inds 1,300 1,200 1,100 1, TP Date CMP Reco Target 1-Oct BUY 1, Oct BUY 1, Jan BUY 1, Mar BUY 1, Apr BUY 1, Jul-15 1,025 NEU 1,100 8-Oct BUY 1, Oct BUY 1, Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 8

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