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 45.21 FIs & Local MFs 13.09 FIIs 18.68 Public & Others 23.02 Source : BSE Satish Mishra satish.mishra@hdfcsec.com +91-22-6171-7334 Deepak Kolhe deepak.kolhe@hdfcsec.com +91-22-6171-7316 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 2016. 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 608.17 964.86 (37.0) 658.17 (7.6) 3,290.76 3,517.29 3,776.42 3,879.18 EBITDA 98.33 82.35 19.4 93.07 5.7 316.02 357.90 448.93 527.59 PAT 65.61 57.42 14.3 63.18 3.8 227.19 251.65 308.92 365.89 Diluted EPS (Rs) 20.3 17.7 14.3 19.5 3.8 70.2 77.8 95.5 113.1 P/E (x) 13.0 11.7 9.6 8.1 EV / EBITDA (x) 9.3 8.2 6.6 5.6 RoE (%) 11.0 11.1 12.4 13.1 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
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) 52.1 49.4 49.3 51.0 Avg Realisation (US$/mcfe) 4.6 3.4 3.5 2.8 Gas price (US$/mmbtu) 3.8 2.9 2.7 2.8 Revenues ($ mn) 206 178 141 117 EBITDA ($ mn) 174 103 86 63 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
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 608.17 964.86 (37.0) 658.17 (7.6) 1,266.34 1,928.37 Material Expenses 430.67 800.11 (46.2) 483.73 (11.0) 914.40 1,605.73 Employee Expenses 9.39 9.32 0.8 12.17 (22.8) 21.56 18.61 Other Operating Expenses 69.78 73.08 (4.5) 69.20 0.8 138.98 146.38 EBIDTA 98.33 82.35 19.4 93.07 5.7 191.40 157.65 Depreciation 23.72 22.27 6.5 22.65 4.7 46.37 42.51 Other Income 16.17 21.40 (24.4) 18.18 (11.1) 34.35 41.86 PBIT 90.78 81.48 11.4 88.60 2.5 179.38 157.00 Interest Cost 6.94 7.58 (8.4) 5.97 16.2 12.91 10.82 PBT 83.84 73.90 13.5 82.63 1.5 166.47 146.18 Tax 18.23 16.48 10.6 19.45 (6.3) 37.68 32.27 APAT 65.61 57.42 14.3 63.18 3.8 128.79 113.91 EPS 20.3 17.7 14.3 19.5 3.8 39.8 35.2 Margin Analysis 2QFY16 2QFY15 YoY(bps) 1QFY15 QoQ (bps) 1HFY16 1HFY15 Material Expenses as % of Net Sales 70.8 82.9 (1,211) 73.5 (268) 72.2 83.3 Employee Expenses as % of Net Sales 1.5 1.0 58 1.8 (31) 1.7 1.0 Other Expenses as % of Net Sales 11.5 7.6 390 10.5 96 11.0 7.6 EBITDA Margin (%) 16.2 8.5 763 14.1 203 15.1 8.2 Net Profit Margin (%) 10.8 6.0 484 9.6 119 10.2 5.9 Tax Rate (%) 21.7 22.3 (56) 23.5 (179) 22.6 22.1 Page 3
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 198.51 249.32 (20.4) 195.52 1.5 394.03 486.47 Refining 512.65 917.81 (44.1) 613.58 (16.4) 1,126.23 1,827.79 E & P 11.66 13.80 (15.5) 12.00 (2.8) 23.66 29.37 Gross Revenues 725.60 1,183.14 (38.7) 823.06 (11.8) 1,548.66 2,347.77 Segmental PBIT Petrochemicals 25.20 24.03 4.9 24.58 2.5 49.78 42.88 Refining 54.14 37.88 42.9 51.41 5.3 105.55 75.61 E & P 0.56 3.32 (83.1) 0.83 (32.5) 1.39 8.19 Total 80.46 65.89 22.1 77.45 3.9 157.91 127.86 PBIT Margins (%) Petrochemicals 12.7 9.6 306 12.6 12 12.6 8.8 Refining 10.6 4.1 643 8.4 218 9.4 4.1 E & P 4.8 24.1 (1,926) 6.9 (211) 5.9 27.9 Change In Estimates (Rs bn) FY16 Old FY16 New % ch FY17 Old FY17 New % ch Revenue 3,664.04 3,517.29 (4.0) 3,989.92 3,776.42 (5.4) EBITDA 338.39 357.90 5.8 445.04 448.93 0.9 PAT 236.73 251.65 6.3 306.04 308.92 0.9 EPS (Rs/sh) 73.2 77.8 6.3 94.6 95.5 0.9 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 375 20.7 32.0 32.6 12.7 8.3 8.1 1.6 1.4 1.3 12.6 18.0 16.7 RIL 912 2,952 BUY 1,100 70.2 77.8 95.5 13.0 11.7 9.6 1.4 1.2 1.1 11.0 11.1 12.4 GAIL 325 609 NEU 350 23.6 29.2 32.1 13.8 11.1 10.1 1.4 1.3 1.2 10.6 12.1 12.2 IGL 482 68 BUY 530 31.3 31.6 34.0 15.4 15.3 14.2 3.2 2.8 2.4 22.7 19.5 18.2 Petronet LNG* 190 142 SELL 154 10.0 11.5 12.8 19.0 16.5 14.8 2.5 2.2 2.0 14.1 14.3 14.3 BPCL 911 659 NEU 885 70.3 69.7 66.4 13.0 13.1 13.7 2.9 2.6 2.3 24.3 20.9 17.6 HPCL 805 272 BUY 930 80.7 86.5 90.4 10.0 9.3 8.9 1.7 1.5 1.4 17.6 17.3 16.2 IOC 406 985 BUY 455 17.1 44.1 42.8 23.7 9.2 9.5 1.4 1.3 1.2 6.2 15.0 13.3, * Consolidated Page 4
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) 109.9 107.1 107.0 85.4 65.0 65.0 65.0 INR-USD 47.9 54.4 60.5 61.2 66.0 66.0 66.0 Refining business GRM (USD/bbl) 8.6 9.2 8.1 8.6 9.6 10.4 11.0 Crude throughput (mmt) 67.7 68.5 68.0 67.9 68.8 68.8 68.8 Upstream business PMT Gas (BCF) 145 115 93 85 81 78 76 Oil (mmbbl) 11 9 8 7 7 7 7 PM Gas price (USD/mmbtu) 5.7 5.7 5.7 5.7 5.7 5.7 5.7 Tapti Gas price (USD/mmbtu) 5.6 5.6 5.6 5.6 5.6 5.6 5.6 KG Gas (mmscmd) 43 26 14 12 12 12 15 Gas price (USD/mmbtu) 4.2 4.2 4.2 5.2 4.7 4.2 4.7 Petrochemicals Sales volume (mmt) 9.0 8.9 9.0 9.1 10.4 13.1 13.8 SOTP Valuation (Based On FY17E) Business EBITDA (Rs bn) Multiple Value (Rs bn) Value* (Rs/sh) Valuation Basis Petrochemicals 169 6.0 1,013 347 EV/EBITDA on FY17E Refining 227 6.0 1,364 467 EV/EBITDA on FY17E E & P PMT 14 4.0 57 20 EV/EBIDTA on FY17E KG D6 gas 36 12 NPV based on DCF NEC 46 16 NPV based on DCF CBM 18 6 NPV based on DCF Investment (US$ bn) Shale gas 8.1 1.0 535 183 x Inv as at Sep-15 Retail 1.8 1.0 120 41 x Inv as at Sep-15 Telecom (R-Jio) 13.0 0.5 430 147 x Inv as on Sep-15 CWIP 1.0 551 188 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 2.923 bn shares (net of treasury shares) Page 5
Standalone Income Statement (Rs bn) FY14 FY15 FY16E FY17E FY18E Revenues 3,901.17 3,290.76 3,517.29 3,776.42 3,879.18 Growth % 8.3 (15.6) 6.9 7.4 2.7 Raw material 3,302.49 2,650.75 2,815.32 2,956.96 2,965.52 Employee cost 33.70 36.86 36.93 41.16 47.33 Other expenses 256.21 287.13 307.14 329.37 338.74 EBITDA 308.77 316.02 357.90 448.93 527.59 EBIDTA margin (%) 7.9 9.6 10.2 11.9 13.6 EBITDA growth % 0.3 2.3 13.3 25.4 17.5 Depreciation 87.89 84.88 88.13 108.39 136.05 Other income 89.36 87.21 85.04 93.36 114.46 EBIT 310.24 318.35 354.82 433.90 506.01 Finance charges 32.06 23.67 25.86 27.42 24.57 PBT 278.18 294.68 328.96 406.48 481.43 Provision for taxes 58.34 67.49 77.31 97.55 115.54 PAT 219.84 227.19 251.65 308.92 365.89 EPS 67.9 70.2 77.8 95.5 113.1 EPS Growth % 4.7 3.3 10.8 22.8 18.4 Standalone Balance Sheet (Rs bn) FY14 FY15 FY16E FY17E FY18E SOURCES OF FUNDS Share Capital 32.32 32.36 32.36 32.36 32.36 Reserves and surplus 1,938.59 2,129.40 2,339.98 2,598.04 2,907.21 Total Equity 1,970.91 2,161.76 2,372.34 2,630.40 2,939.57 Short Term debt 227.70 129.14 154.14 154.14 154.14 Long Term debt 627.11 762.27 862.27 852.27 652.27 Total Debt 854.81 891.41 1,016.41 1,006.41 806.41 Deferred tax liability 122.15 126.77 126.77 126.77 126.77 Long term provision - 14.04 14.04 14.04 14.04 TOTAL SOURCES OF FUNDS 2,947.87 3,193.98 3,529.56 3,777.62 3,886.79 APPLICATION OF FUNDS Net fixed assets 803.68 797.78 889.65 1,428.26 1,774.21 Intangible assets 290.38 347.85 347.85 347.85 347.85 Capital WIP 326.73 651.78 900.78 550.78 200.78 Intangibles WIP 90.43 105.75 105.75 105.75 105.75 Long-term Loans and Advances 284.36 292.59 292.59 292.59 292.59 Investments 526.92 620.58 680.58 740.58 800.58 Inventories 429.32 365.51 385.46 413.85 425.12 Debtors 106.64 46.61 49.82 53.49 54.94 Cash and Cash equivalent 699.94 620.86 517.71 524.15 580.13 ST Loans and Advances 112.77 123.07 123.07 123.07 123.07 Other Current Assets 4.66 5.47 5.47 5.47 5.47 Total Current Assets 1,353.33 1,161.52 1,081.53 1,120.03 1,188.73 Creditors 578.62 544.70 530.00 569.05 584.53 Other Current Liabilities 107.67 190.63 190.63 190.63 190.63 Provisions 41.67 48.54 48.54 48.54 48.54 Total Current Liabilities 727.96 783.87 769.17 808.22 823.70 Net Current Assets 625.37 377.65 312.35 311.81 365.03 TOTAL APPLICATION OF FUNDS 2,947.87 3,193.98 3,529.56 3,777.62 3,886.79 Page 6
Standalone Cash Flow (Rs bn) FY14 FY15 FY16E FY17E FY18E Reported PAT 219.84 227.19 251.65 308.92 365.89 Other income (net of tax) (89.31) (87.15) (84.98) (93.28) (114.35) PAT FROM OPERATIONS 130.53 140.04 166.67 215.64 251.54 Depreciation 87.89 84.88 88.13 108.39 136.05 Interest 32.06 23.67 25.86 27.42 24.57 Working capital change (49.10) 159.98 (37.85) 6.98 2.77 OPERATING CASH FLOW 201.38 408.57 242.81 358.43 414.93 Capex (310.47) (476.82) (429.00) (297.00) (132.00) Free Cash Flow to Firm (109.09) (68.25) (186.19) 61.43 282.93 Investments (169.68) (48.58) (60.00) (60.00) (60.00) Other income (net of tax) 89.31 87.15 84.98 93.28 114.35 INVESTING CASH FLOW (390.84) (438.25) (404.02) (263.72) (77.65) Capital issuance - - - - - Debt issuance 309.58 36.60 125.00 (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 246.60 (19.75) 58.06 (88.28) (281.30) NET CASH FLOW 57.14 (49.43) (103.15) 6.44 55.98 Closing cash 699.94 620.86 517.71 524.15 580.13 Standalone Key Ratios FY14 FY15 FY16E FY17E FY18E PROFITABILITY % EBITDA Margin 7.9 9.6 10.2 11.9 13.6 EBIT Margin 8.0 9.7 10.1 11.5 13.0 APAT Margin 5.6 6.9 7.2 8.2 9.4 RoE 11.7 11.0 11.1 12.4 13.1 Core RoCE 8.9 7.4 7.4 8.3 9.1 RoCE 9.1 8.0 8.1 9.0 10.0 EFFICIENCY Tax rate % 21.0 22.9 23.5 24.0 24.0 Total Asset turnover (x) 1.5 1.1 1.1 1.1 1.1 Inventory (days) 40 41 40 40 40 Debtor (days) 10 5 5 5 5 Payables (days) 54 60 55 55 55 Cash conversion cycle (days) (4) (15) (10) (10) (10) Net Debt/EBITDA (x) 0.5 0.9 1.4 1.1 0.4 Net D/E 0.1 0.1 0.2 0.2 0.1 Interest coverage 9.7 13.4 13.7 15.8 20.6 PER SHARE DATA EPS (Rs) 67.9 70.2 77.8 95.5 113.1 CEPS (Rs) 95.2 96.4 105.0 129.0 155.1 DPS (Rs) 9.5 9.5 10.5 13.0 14.5 BV (Rs) 609.8 668.0 733.1 812.9 908.4 VALUATION P/E (x) 13.4 13.0 11.7 9.6 8.1 P/Cash EPS (x) 9.6 9.5 8.7 7.1 5.9 P/BV (x) 1.5 1.4 1.2 1.1 1.0 EV/EBITDA (x) 9.6 9.3 8.2 6.6 5.6 EV/Revenue (x) 0.8 1.0 1.0 0.9 0.8 Dividend Yield (%) 1.0 1.0 1.2 1.4 1.6 CFO/EV (%) 6.5 12.7 7.0 10.4 13.1 FCFF/EV (%) (3.5) (2.1) (5.4) 1.8 8.9 FCFE/M Cap (%) 5.7 (1.9) (2.9) 0.8 2.0 Page 7
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 1,000 900 800 700 TP Date CMP Reco Target 1-Oct-14 945 BUY 1,100 14-Oct-14 958 BUY 1,100 19-Jan-15 870 BUY 1,100 19-Mar-15 867 BUY 1,100 20-Apr-15 927 BUY 1,050 27-Jul-15 1,025 NEU 1,100 8-Oct-15 889 BUY 1,100 19-Oct-15 912 BUY 1,100 600 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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