Reliance reported a large beat in Q1 earnings driven by gross refining margin (GRM) of $11.5/barrel. However, based on management commentary, we believe $2-2.4/barrel of this may not be replicable going forward. Management refrained from committing a launch date for Jio. While timelines for downstream projects were maintained, the full impact of these could show only by H2FY18. Capex in the quarter was higher than expected at $4 bn. Reliance also moved to Ind-AS in Q1.
Big beat in refining earnings in Q1 but helped by one-offs
Reliance reported a large beat in Q1 earnings against our and consensus estimates, mainly on account of higher GRM of $11.5/barrel. However management indicated hedging plus inventory gains to the tune of $2/barrel; moreover, higher sales than throughput during the quarter may have added another $0.4/barrel to GRM by our estimate—both of these are one-off in nature in our view. Net profit was also aided by a sharp decline q-o-q in depreciation—part of this was on account of Ind-AS adoption.
No launch date for Jio yet
While management indicated that Jio currently has over 1.5m users, it still did not commit to a firm launch date. The subscribers are using 26 GB of data and 355 minutes of voice per month on average. Reliance said that the current user base is well divided across all circles. It also indicated that it has 90,000 towers operational and 32-33,000 employees on the rolls of Jio.
Timelines for commissioning of key downstream projects maintained but full ramp-up likely to take 5-6 months
Reliance maintained commissioning timelines for key downstream projects viz. petcoke gasifiers in H2FY17, ROGC in Q3FY17, PX in H2FY17. However it indicated that petcoke gasifier and other projects are likely to take 5-6 months to reach full utilisation implying full impact on numbers only by H2FY18.
Capex of $4 bn in Q1
Capex in Q1 totaled $4 bn—$2.1 bn on Jio and $1.2 bn on downstream projects and R3 bn on account of forex losses capitalised. We note that capex in Q1 is 45% of the full year capex guidance of $9 bn given at the end of Q4.
Ind-AS adopted in Q1
Reliance adopted Ind-AS in Q1 with some implications for P&L and balance sheet. We have also made changes to our exchange rate assumptions, shale model, RJio estimates leading to small net changes in earnings estimate and fair value.
Our fair value of R1,185 (prev. R1,190) for Reliance is based on a SOTP of the different businesses and implies 14.5x FY18e P/E. Lower downstream margins, delays and cost overruns in new projects and adverse regulation are the risks.
Downstream capex guidance of $19 bn maintained but Jio capex guidance likely to be exceeded
Management maintained its capex guidance for downstream projects of $19 bn of which
$16.7 bn has been spent to date. However Jio capex guidance of R1.5 trn is likely to be exceeded as Reliance plans to increase its coverage from existing 70% to 90% by FY18 end. R1.5 trn guidance also did not include any spend in the upcoming spectrum auctions. Management also indicated that it plans to infuse another R150 bn of equity into Jio. It indicated that Jio capex to date includes R500 bn on spectrum, R350-400 bn each on physical (fibre & towers) and network infrastructure (network equipment).
1022 fuel pumps are operational now vs. 950+ at Q4 end
Reliance Retail revenues includes R10 bn contribution from CoCo fuel retailing outlets: While Reliance reported a sharp 42% y-o-y growth in retail revenues in Q1, management explained that this includes R10 bn from 360 CoCo fuel retailing outlets.
Significant scale down in shale investment in CY16: As guided Reliance has no rigs in place in its shale JVs and capex in Q1 reduced to $40m. It indicated that its new domestic upstream projects are likely to start producing only by 2020.