Reliance Industries

ACCUMULATE
Price Rs1,785
Target Price Rs1,833
Investment Period 12 months
Stock Info
Sector Oil & Gas
Market Cap (Rs cr) 2,80,852
Beta 1.2
52 WK High / Low 2707/ 930
Avg. Daily Volume 1713210
Face Value (Rs) 10
BSE Sensex 11,329
Nifty 3,481
BSE Code 500325
NSE Code RELIANCE
Reuters Code RELI.BO
Bloomberg Code RIL@IN
Shareholding Pattern (%)
Promoters 49.0
MF/Banks/Indian FIs 13.8
FII/ NRIs/ OCBs 20.1
Indian Public/others 17.1
Abs. 3m 1yr 3yr
Sensex (%) 30.6 (32.2) (4.9)
RIL (%) 54.8 (30.9) 82.7
􀂃 Lower crude, Product prices lead to Net Sales decline: Reliance
Industries’ (RIL) 4QFY2009 numbers were below our expectation on the
Top-line front while the same exceeded our expectations on the Bottom-line
front. RIL’s Top-line fell by 23.9% yoy to Rs28,362cr (Rs37,286cr) primarily
due to the 31.1% and 24.6% yoy fall in Petrochem and Refining Revenues
to Rs9,724cr and Rs21,631cr, while Net Profit (excluding Exceptional items)
fell 1.0% yoy to Rs3,874cr (Rs3,912cr). Crude processing during the quarter
was 7.79mn tonnes (8.10mn tonnes), a decline of 3.8% yoy. For FY2009,
Top-line increased by 9.6% yoy to Rs1,46,291cr (Rs1,33,443cr) on the back
of higher crude and product prices in 1HFY2009.
􀂃 Refining Margins disappoint; Petrochemical strengthens: During the
quarter, RIL reported GRMs at US $9.9/bbl (US $15.5/bbl) as against our
expectation of US $10.5/bbl. Benchmark complex Singapore Margins,
during the quarter, stood at around US $5.4/bbl. Thus, RIL managed to earn
a spread of US $4.5/bbl, which was marginally lower than its previous
performances. Improvement in Petchem Margins, on a qoq basis, continued
in 4QFY2009 as well. Petchem Margins stood at a strong 17.7% (10.4%)
yoy. On the Core business front, blended EBIT Margins stood at 14.5%
(12.4%) during the quarter.
􀂃 Interest Expense increases, Other Income surges: Debt at the end of
FY2009 increased substantially to Rs53,457cr (Rs36,480cr) yoy primarily on
account of increased borrowings and interest capitalisation. This increase in
debt coupled with Rupee depreciation resulted in a 75.4% yoy increase in
Interest Expenditure to Rs477cr (Rs272cr) for the quarter. Other Income
during the quarter increased significantly to Rs993cr (Rs289cr) due to higher
Interest Income on account of higher Cash and gain on sale of investments.
􀂃 PAT declines by 1.0%: PAT during 4QFY2009 stood at Rs3,546cr
(Rs3,912cr) registering a de-growth of 9.4% yoy. However, reported PAT
was suppressed because of Exceptional Item of Rs370cr incurred towards
estimated claims on account of subsidiaries. Excluding this, PAT stood at
Rs3,874cr (Rs3,912cr), a decline of a mere 1% yoy. For FY2009, PAT after
adjusting for Exceptional Items, stood at Rs15,607cr (Rs15,261cr).
Key Financials (Consolidated)
Y/E March (Rs cr) FY2008 FY2009 FY2010E FY2011E
Net sales 137,147 155,670 200,004 229,575
% chg 20.5 13.5 28.5 14.8
Net Profit 19,521 15,520 21,511 27,098
% chg 61.7 (20.5) 38.6 26.0
EPS (Rs) 118.8 94.5 130.9 164.9
EBITDA Margin (%) 16.9 15.8 18.9 19.4
P/E (x) 13.3 18.9 13.6 10.8
RoE (%) 15.6 15.6 17.5 18.3
RoCE (%) 13.1 13.1 14.2 15.4
P/BV (x) 3.0 2.6 2.2 2.0
EV/ Sales (x) 2.2 2.1 1.5 1.3
EV/ EBITDA 13.2 13.0 9.6 6.8
Source: Company, Angel Research
Performance Highlights
Amit Vora
Tel: 022 – 4040 3800 Ext: 322
e-mail: amit.vora@angeltrade.com
Deepak Pareek
Tel: 022 – 4040 3800 Ext: 340
e-mail: deepak.pareek@angeltrade.com
April 24, 2009 2
Oil & Gas
Reliance Industries
Segment-wise Performance
Refining and Marketing (R&M): The R&M Segment delivered a subdued performance
amidst volatility in crude and product prices and demand contraction. Decline in crude oil
prices led to 24.6% yoy reduction in R&M Revenues to Rs21,631cr (Rs28,686cr). On full
year basis, R&M Revenues increased to Rs1,12,351cr (Rs1,00,743cr). Crude processing
during the quarter stood at 7.79mn tonnes (8.10mn tonnes), which was lower by 3.8%
yoy, with the company reporting capacity utilisation at 94.4%. Crude oil processed was
also lower qoq, with 7.87mn tonnes of crude processed in 3QFY2009. On the Margins
front, RIL reported lower-than-expected GRMs of US $9.9/bbl (US $15.5/bbl) as against
our expectation of US $10.5/bbl. Even for FY2009, GRMs fell to US $12.2/bbl
(US $15.0/bbl) as refinery cracks declined sharply in the second half on the back of lower
crude prices and demand contraction. Thus, during the quarter, EBIT Margins were under
pressure on a yoy basis, declining by 87bp. However, the same showed a marginal
improvement on a qoq basis.
Exhibit 1: RIL v/s Benchmark Singapore GRMs
Source: Company, Angel Research
Exhibit 2: Crude Processing and Capacity Utilisation
Source: Company, Angel Research
0
2
4
6
8
10
12
14
16
18
Q1FY06
Q2FY06
Q3FY06
Q4FY06
Q1FY07
Q2FY07
Q3FY07
Q4FY07
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
GRMs US $/bbl
RIL GRMs Singapore GRMs
7
7.2
7.4
7.6
7.8
8
8.2
8.4
20
40
60
80
100
120
Q1FY07
Q2FY07
Q3FY07
Q4FY07
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
mn tonnes
Capacity Utilisation %
Capacity Utilisation % Crude Processing mn tonnes (RHS)
April 24, 2009 3
Oil & Gas
Reliance Industries
Petrochemicals: The Petrochemical Segment Revenues fell 31.1% yoy to Rs9,724cr
(Rs14,119cr) due to lower crude and product prices on yoy basis. However during the
quarter, product deltas showed an improvement, which led to spike in EBIT Margins by
733bp to 17.7% (10.4%). Even sequentially, Margins improved by 458bp.
Exhibit 3: EBIT breakup
Source: Company, Angel Research
Other Highlights
Exploration and Production (E&P): During the quarter, RIL along with Bharat Petroleum
was awarded the deep water block KG-DWN-2005/2 under NELP VII. RIL also made two
gas discoveries during 4QFY2009, one in KG-VD3 Block and other in KG-D6 Block.
On the Production side, oil production from the KG D6 Block has yet to commence as it
was shutdown for repair works in December 2008. According to RIL, production is
expected to resume in the last week of April 2009. RIL commenced its gas production from
April 2, 2009 and effects of which on Revenues and Profitability will be seen 1QFY2010
onwards.
Increased capex towards E&P: During 4QFY2009, RIL incurred capex of Rs6,798cr,
majority of which was spent towards E&P, taking the company’s total capex to Rs24,907cr
for FY2009.
RPL Refinery commissioned: RPL, which dispatched its first parcel of refinery products
in January 2009, processed 3.6mn tonnes of crude during the quarter generating
Revenues of Rs3,678cr and Net Profit of Rs84cr.
Reliance Retail: At the end of 4QFY2009, Reliance Retail had more than 900 operational
stores (same as 3QFY2009) spread across 80 cities with 4.2mn square feet of trading
space. No new stores were opened during the quarter as RIL is in the process of
consolidating its presence in the Retail business.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
4QFY2008 1QFY2009 2QFY2009 3QFY2009 4QFY2009
Petrochemicals Refining Oil and gas Others
April 24, 2009 4
Oil & Gas
Reliance Industries
Outlook
The last six months have been a very challenging period for the company. The global
slowdown has exerted severe pressure on RIL’s benchmark Refining and Petrochemical
Margins.
Petrochemical Segment
RIL has stated that in spite of the ongoing slowdown, it has managed to improve its
cracking margins on account of fairly resilient domestic demand (72% of total demand),
which is less affected by the global slowdown. Revival in Margins could also be attributed
to the de-stocking done in the previous year, and with demand rebounding in 4QFY2009
on account of stability in the feedstock prices resulting in re-stocking at the downstream
level. Margins have particularly improved significantly in the ethylene chain. Improvement
in naphtha prices by more than 100% from its lows also resulted in propylene prices
increasing by 130%. Similarly, as the domestic demand is less affected by the slowdown,
the company was able to charge better Margins in the domestic markets over and above
the International Margins.
Exhibit 4: Domestic demand less affected by slowdown
Source: Company
Global petrochemical capacity is likely to increase by around 23% over the next 2-3 years
with significant capacity additions in China and the Middle East. The addition is set to
impact the Operating rates and Margins going forward. Thus, the current global slowdown
coupled with increasing global capacities and end of re-stocking at the downstream level
are likely to cap the Margin upside. However, we continue to believe that due to the
integrated nature of operations, RIL is likely to be lesser affected due to Margin
compression in the Petrochemical Segment.
Refining Segment
The ongoing global slowdown has resulted in demand for Petroleum products at 3.2mnbpd
in 4QFY2009. The decline in demand was more severe in the Middle Distillates Segment,
which was also noticeable from the reducing cracks in the space. However, the weak
demand did not reflect completely in the Margins as the fall in product prices lagged the
decline in crude oil prices resulting in an improvement in the benchmark Singapore
Margins on a qoq basis. Demand is expected to continue to be lower over the next few
quarters on the back of weakness in the global economy and with additional around
1.5mnbpd new refining capacity also likely to come up during the later part of year would
result into surplus capacity in turn maintaining the pressure on Margins.
April 24, 2009 5
Oil & Gas
Reliance Industries
We believe Refining Margins are likely to remain subdued going forward in the range of
US $3.5-4.0 per barrel. Moreover, weakness in heavy and light crude differential in the
Asian markets coupled with softening middle distillate cracks is likely to keep RIL’s
premium over the benchmark Singapore Margins under pressure. However, we expect
RIL to maintain its GRMs in the range of US $8.5-9.0 per barrel. However, RIL is better
placed than its peers amidst the ongoing slowdown owing to its low operating cost of
around US $2/bbl compared to industry average cost of US $5/bbl.
E&P Segment
Subdued performance of RIL’s extant businesses is more than likely to be compensated
by its E&P business. RIL has started gas production from KG-D6. Similarly, the crude
production from its MA fields, which is currently shut down, is likely to commence with
increased production of 30,000bpd. Thus, the E&P Segment is poised to deliver good set
of number in the current fiscal. However, full impact of the same will be visible in FY2011.
Moreover, we expect news flows associated with the E&P Segment to be critical
considering the fact that the extant business is likely to see subdued performance in the
near term. RIL has planned E&P activities in the prospective Cauvery, Mahanadi and
Kerala Konkan basins. Thus, any news discoveries from these blocks will provide added
upside to our valuations.
Exhibit 5: FY2010 Exploration Outlook
Source: Company
April 24, 2009 6
Oil & Gas
Reliance Industries
Valuation
RIL has successfully been able to execute its two mega ventures, viz. KG basin gas and
the RPL refinery with minimal execution problems. These ventures speak about RIL’s
successful execution capacity as KG-D6 is one the fastest deep water development across
the globe, while the RPL refinery is one of the most complex refineries. We expect these
ventures to be likely key drivers of Profitability over the next couple of years.
Commencement of gas production coupled with increased oil production is likely to
increase the share of E&P in the profit matrix in turn reducing the company’s exposure to
cyclical segments. Thus, we continue to remain positive on the future growth prospects of
the company. We maintain an Accumulate on RIL, and based on our FY2010E EPS of
Rs130.9 and Target P/E multiple of 14x, we ascribe a Fair Value of Rs1,833 on the
stock.
April 24, 2009 7
Oil & Gas
Reliance Industries
Exhibit 6: 4QFY2009 Performance
Y/E March (Rs cr) 4QFY2009 4QFY2008 %chg FY2009 FY2008 %chg
Net Operating Income 28,362 37,286 (23.9) 146,291 133,443 9.6
COGS 14,461 26,896 (46.2) 98,971 92,170 0.0
Total operating expenditure 22,925 31,268 (26.7) 122,896 110,138 11.6
EBITDA 5,437 6,018 (9.7) 23,395 23,305 0.4
EBITDA Margin (%) 19.2 16.1 16.0 17.5
Other Income 993 289 243.6 2,033 895 127.2
Depreciation 1,327 1,380 (3.8) 5,059 4,847 4.4
Interest 477 272 75.4 1,692 1,077 57.1
Extraordinary Items (370) 0 (370) 4,733
PBT 4,256 4,655 (8.6) 18,307 23,009 (20.4)
PBT Margin (%) 15.0 12.5 12.5 17.2
Total Tax 710 743 (4.4) 3,028 3,551 (14.7)
% of PBT 16.7 16.0 16.5 15.4
PAT 3,546 3,912 (9.4) 15,279 19,458 (21.5)
PAT Margin (%) 12.5 10.5 19.2 10.4 14.6
PAT without Ext. item 3,874 3,912 (1.0) 15,607 15,261 2.3
Source: Company, Angel Research
Exhibit 7: Segment-wise Performance
Y/E March (Rs cr) 4QFY2009 4QFY2008 %chg FY2009 FY2008 %chg
Revenues
Petrochemicals 9,724 14,119 (31.1) 52,767 52,999 (0.4)
Refining & Marketing 21,631 28,686 (24.6) 112,351 100,743 11.5
Oil & Gas 736 828 (11.1) 3,489 2,702 29.1
Others 210 342 (38.6) 638 778 (18.0)
Gross Revenue 32,301 43,975 (26.5) 169,245 157,222 7.6
EBIT
Petrochemicals 1,722 1,466 17.5 6,855 7,114 (3.6)
Refining & Marketing 1,953 2,839 (31.2) 9,648 10,331 (6.6)
Oil & Gas 473 447 5.8 2,226 1,503 48.1
Others 12 9 33.3 37 40 (7.5)
Total EBIT 4,160 4,761 (12.6) 18,766 18,988 (1.2)
EBIT Margin (%)
Petrochemicals 17.7 10.4 13.0 13.4
Refining & Marketing 9.0 9.9 8.6 10.3
Oil & Gas 64.3 54.0 63.8 55.6
Others 5.7 2.6 5.8 5.1
Total 12.9 10.8 11.1 12.1
Source: Company, Angel Research
April 24, 2009 8
Oil & Gas
Reliance Industries
Research Team: Tel: 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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