Monday, May 28, 2012

>RELIANCE INDUSTRIES: Shale gas business turns profitable

  We did try. We have updated our earnings model for RIL’s FY2012 annual report.
A difficult operating environment in the core chemical and refining segments, declining reserves and regulatory issues in the E&P segment and fair valuations constrain us from taking a more positive view on the company despite the recent sharp correction in the stock price. We maintain our REDUCE rating on RIL stock with a revised 12-month forward TP of `730 (`770 previously); the reduction in TP reflects lower valuation to the
E&P segment and higher net debt.

■ Sharp decline in proved developed oil and gas reserves
RIL has reduced its estimates of proved reserves (excluding BP’s share) for (1) oil by 2.61 mn tons to 3.06 mn tons and (2) gas by 12.4 bcm to 104 bcm as of end-FY2012. The revision in proved reserves reflects (1) downward revision in reserves for D1, D3 and MA-1 fields, (2) downward revision in reserves for satellite fields (D2, D6, D22 and D26), (3) inclusion of reserves from R-series discovery (D34) and (4) upward revision in gas reserves for CBM fields. Proved developed reserves have declined sharply for (1) oil by 2.66 mn tons to 2.42 mn tons and (2) gas by 38.8 bcm to 25.2 bcm as of end-FY2012. We highlight that RIL’s current proved developed reserves correspond to around three years of production of gas and oil, assuming production were to continue at the current levels. Exhibit 1 gives details of movement in RIL’s proved reserves.

■ Shale gas business turns profitable; E&P and retailing subsidiaries continue to make losses
RIL’s subsidiaries in the US shale gas business reported a cumulative net income of `3.7 bn despite lower gas prices reflecting higher contribution from condensate production. RIL’s international E&P subsidiary, Reliance Exploration and Production DMCC, reported a loss of `3.9 bn versus `8.8 bn in FY2011. The loss includes write-off of `2.6 bn (`8.1 bn in FY2011) from recently relinquished blocks––(1) Block-18 and Block-41 in Oman and (2) Block-K in East Timor. RIL’s retailing subsidiaries reported a net loss before taxes of `6.5 bn on sales of `74 bn in FY2012 compared to a loss of `6.5 bn on sales of `61 bn in FY2011.

■ Fine-tune estimates; maintain REDUCE with a TP of `730
We have revised our EPS estimates for FY2013E, FY2014E and FY2015E to `57.4 (+1.9%), `59.7 (+1.7%) and `67.1 (-3.6%) reflecting (1) weaker exchange rate assumptions for FY2013-14E, (2) FY2012 annual report and (3) other minor changes. We maintain our REDUCE rating on the stock with a 12-month forward SOTP-based target price of `730 (`770 previously).

To read report in detail: RELIANCE INDUSTRIES

>INDIA STRATEGY: A brave new India

A brave new India: We see some of the recent actions of the Indian executive, judiciary and regulators as an attempt to restore the primacy of law and democratic institutions in India. We hope for an equitable, inclusive and transparent development model after eradication of a system based on corruption, cronyism and dysfunctional systems. It may have resulted in strong economic activity but it is also extracted very high invisible costs from the indian economy and society. 

To read report in detail: INDIA STRATEGY

>HINDALCO INDUSTRIES: Intention to withdraw from the Evermore recycling JV (55.8% stake) with Alcoa

  4Q adj. EBITDA/t down 10% yoy — Novelis’ adj. EBITDA fell 17% yoy to $233m (Citi est $256m) largely due to an 8% yoy fall in volumes on destocking (weakness in electronics business) and higher operating costs. EBITDA/t was $316 vs. $350 last year and $312 in 3QFY12 (seasonally weak). FY12 adj EBITDA/t was $353 (+2% yoy). Management has indicated that demand should grow and expects FY13 adj EBITDA to be higher than $1.05bn reported in FY12. Novelis’ focus on technically complex products, strong customer relationships and pass through model should result in steady earnings in forthcoming quarters.

  Demand muted in 4Q; 1Q to be better — 4Q volumes fell 8% yoy at 738kt due to inventory destocking. Total volumes in FY12 were 2.98mt (-4% yoy) due to falling demand in cans (-1%), light gauge and industrial products; auto demand improved. FY12 trends: 1) Shipments fell 4% yoy in N. America (36% of volumes) on lower can demand − market softness and contract transitions partially offset by higher auto volumes; 2) Europe (32%) shipments fell 3% due to lower demand for industrial/light gauge/foil while can/auto segments improved. Sale of non-core operations and focus on recycling should help going forward. 3) Shipments from Asia (17%) fell 8% due to global uncertainty and fall in electronic products (export
slowdown); can volumes were flat. 4) S. America (14%) volumes were flat.

  Restructuring — Continuing its restructuring, Novelis has announced: (1) Intention to withdraw from the Evermore recycling JV (55.8% stake) with Alcoa; (2) Closure of its Saguenay plant in Canada effective Aug 12; (3) Divesture of three foil mills in Europe by mid-2012; (4) Novelis now owns 99% in Novelis Korea after it acquire 31.2% for $343m in 3QFY12.

  Recycling capacity — Novelis has increased recycling content in products from 33% in FY11 to 39% in FY12. Its target is to reach 50% recycling by 2015. To this end Novelis: (1) has commissioned a new recycling center at Alunorf in Europe in Mar 12; (2) plans to invest $250m in Germany for a 400kt recycling facility; (3) plans to expand recycling capacity in Brazil and South Korea.

  Expansions — Expansion plans include taking Novelis’ effective capacity from 3.3mt to ~4mt by FY16: (1) ~220kt by end CY12 in Brazil to 600kt; (2) ~350kt by end CY13 to take capacity to ~1,000kt in South Korea; (3) ~200kt by mid CY13 at Oswego, NY; (4) ~120kt automotive sheet plant in China by end-CY14. Capex is estimated at $650-700m in FY13 vs $516m in FY12.

To read report in detail: HINDALCO INDUSTRIES