Benign margins, new projects, a dash of telecom and the promise of a transformational new business, then E&P (exploration and production), had defined Reliance’s investment thesis in the Summer of ’03. Fifty quarters on, similar hopes line the horizon. As Q3FY16 EPS (+8.5% q/q) shows, Reliance is thriving in the current macro while $17 bn in new projects may lift Ebitda 44% to $9.4 bn in FY16-18. Yet, after its 30% outperformance relative to the Sensex in the past year, valuations, at ~10x FY17e EV/Ebitda, are richer than they were in the Summer of ’03 and relative to energy peers, implying that the success of the potentially transformational telecom project may be key to driving share price upside. Expectations remain modest here, though, setting the Street up for a positive surprise. We stay OW.
Q3: Reliance’s Q3 consol net rose 8.5% q-o-q to R72.9 bn coming 3.6% ahead of our forecast. Standalone EPS was 1.4% softer than we expected though, despite higher other income. While higher taxes hurt, Ebitda was 2.8% lower too as softer refining offset stronger petchem. Shale was a drag as expected; retail performed well.
Margins: Even so, refining performance was credible with core EPS momentum likely to improve further in Q4; benchmark refining and petchem spreads have risen, for example. Indeed, benign global demand-supply balances may bode well for the medium term too.
Cashflow: Amidst stronger earnings, capex surged to $12.3 bn in 9M16 too, though. Yet, consol net debt rose just $0.8 bn over Mar-15 to $13 bn with deferred vendor dues helping. With this likely to reverse in 12-18 months, $2.5-3.0bn still to go on downstream projects and telecom capex ongoing (c$17 bn spent), gearing may peak only in FY17.
Projects: Yet, as its key projects start-up over the next year, Ebitda may also rise 53% in FY15-18e to $9.4 bn. Rubber, PSF, PFY, PTA and PET are on-stream; PX is due in Q4FY16, the first of the five IGCC modules is likely in 1H2016 while the ROGC is on track for Q3FY17.
Telecom: Yet, this would still leave valuations adjusted for treasury shares and deferred vendors and spectrum dues at 8.5x FY18E EV/Ebitda. This compares favourably with its ~10x long term average but is at a premium to energy peers suggesting that success in the telecom project (launch due in 1H16), may be key to driving further share price upside.
OW: This is still uncertain but the superior 4G technology, unparalleled and strengthening spectrum bank, a fast evolving handset ecosystem and the differentiated infrastructure build could indeed make this a transformational project for Reliance. We remain OW.