Friday, October 21, 2011

>RELIANCE INDUSTRIES: 2QFY12 results; revise EPS, target, reco

Reliance’s 2QFY12 net profit rose 0.7%QoQ to Rs57bn – 1% below expectation.
Ebitda came 7% ahead as weak refining was offset by better petchem. E&P Ebit
was also higher due to lower DD&A and higher liquids output. Forex losses and
lower other income pulled reported EPS estimates. We have cut FY12/13 EPS by
4/2% primarily to model a $0.2-0.3/bbl cut to GRMs. We also reset our 12m
forward target to Rs950/sh. After recent stock price rally, this implies only a 10%
upside; we revise our reco to O-PF noting also that the stock is again trading at a
premium to global peers with implied E&P value similar to the base BP-deal value.

2QFY12 net up 0.7% QoQ. Reliance’s 2QFY12 net rose 16%YoY/1%QoQ to Rs57bn
(Rs17.4/sh) – 1.3% below estimates. Lower refining was offset by better petchem
while E&P Ebit was also higher than expected on lower depreciation and higher liquids
output. Overall, core Ebit (Rs71.5bn, +9%QoQ) was 9% ahead. However, a large forex
loss (Rs4.4bn) and lower than expected other income pulled reported profit below our
estimates. Reliance also adjusted Rs45bn in translation losses on its forex debt on its
balance sheet driving up reported debt and fixed assets by this amount.

GRMs fall QoQ. Refining Ebit declined 4% QoQ – 10% below expectation led by a
US$0.2/bbl QoQ decline in GRMs (US$10.1/bbl) – US$0.4/bbl below estimates. As in
the last few quarters, Reliance’s realised margins continue to lag the strength in Singcomplex
margins (+US$0.5/bbl QoQ); for the quarter management attributed this to
primarily to softer light-heavy spreads, lower gasoil spread and use of higher cost LNG.

Strong petchem. Petchem Ebit rose 9%QoQ (16% above estimate), though, on
higher margins in polymers and chemicals offset by lower chain margins in polyesters.
A rebound in domestic demand (+21%QoQ in both polymers and polyesters) would
have helped while implied opex was also sharply lower (down 16%QoQ).

Mixed outcomes in E&P. Reliance adjusted the BP-deal from end Aug-11 leading to a
Rs32.2bn cut to E&P gross block; lower DD&A drove E&P Ebit up 4%QoQ even as KGD6
gas volumes declined 4mmscmd QoQ. Our interaction during the analyst meet
indicates that drilling and completions of additional wells may take 2-3 years implying
that a quick rebound in output is unlikely. Monetisation of other discoveries in KG-D6,
NEC-25 etc are also continent on government approvals and are unlikely before 2015.
Reliance also underscored that it has frozen exploration activity pending the outcome
of comprehensive review with BP. Progress in shale-gas is encouraging though, with
the Pioneer JV now producing at 6mmscmd of gas and ~25kbpd of condensate.

We lower EPS by 2-4%. We make several changes to our model, including an
US$0.2-0.3/bbl cut to GRMs, leading to a 4/2% cut to FY12/13 EPS. Lower earnings
and an alignment of NEC-25 resources to recent media comments (1.2tcf) leads to a
5% cut to our Mar-12 fair value to Rs915/sh; we set our 12-month target at Rs950/sh.

Revising rec to O-PF. After the recent rally, this implies just a 10% upside; we are
revising our reco to O-PF. We also highlight that the stock now implies an E&P value
similar to the base-value of the BP transaction (US$7.2bn for 30%) and is again
started trading at a 1-39% premium to peers on earnings based valuation multiples.

To read the full report: RIL