RIL’s consolidated EPS increased 17% y-o-y to R94 in FY2016 led by (i) higher downstream margins and (ii) commissioning of polyester chain projects. RIL’s core earnings will grow robustly over the next two years led by contribution from downstream projects, notwithstanding moderate overruns in capital expenditure and indicated delays in projects. We retain ADD rating on the stock with an unchanged SOTP-based target price of R1,130, given reasonable valuations.
Q4FY16 results in line with our ahead-of-consensus estimates: RIL reported standalone Ebitda at R107.3 bn and net income at R73.2 bn in Q4FY16, both in line with our ahead-of-consensus estimates, as the company benefited from (i) robust refining and petrochemicals margins and (ii) steady crude throughput and higher production volumes of polyesters and intermediates. Refining margins were at $10.8/bbl, reflecting a premium of $3/bbl over Singapore complex margins. Lower-than-expected other income at R18.6 bn was offset by lower interest cost and lower effective tax rate at 23%. RIL’s consolidated Ebitda increased 5.6% q-o-q to R120.1 bn and adjusted net income increased 1.5% q-o-q to R74 bn (EPS of R25.1), reflecting strength in standalone performance. RIL’s consolidated Ebitda increased 18% y-o-y to R443 bn in FY2016.
Moderate increase in ‘reported’ net debt despite significant capital expenditure
RIL’s consolidated net debt increased moderately to R950 bn as on March 31, 2016 from R764 bn as on March 31, 2015, despite significantly large capital expenditure of R1.13 tn. The capital expenditure was funded by cash profits of R395 bn and large working capital savings, including creditors for capex of R547 bn. The management indicated that the ‘reported’ net debt will peak at about R15 tn by end-FY2017, post remaining capital expenditure of $9 bn on ongoing projects; the net debt may remain steady for 1-2 years as the company may use free cash flows to pay off creditors for the expenditure.
Fine-tune estimates and retain target price at R1,130
We revise our FY2017-18e EPS estimates (standalone) for RIL to R88.4 (-0.7%) and R99.4 (-0.9%) factoring in (i) modestly lower refining margins, (ii) higher petrochemicals margins and (iii) other minor changes. The company indicated delays in commissioning of petcoke gasification and PX expansion projects, which had limited impact on our estimates as we had assumed lower utilisation rates for FY2017. Our target price remains unchanged at R1,130, based on September 2017 estimates. Our reverse valuation exercise shows that RIL stock is ascribing 5.8X EV/Ebitda to its core businesses post completion of ongoing projects, while factoring in nil equity value from non-core businesses of telecom and US shale. RIL’s reasonable valuations reflect investors’ muted expectations from the company’s telecom foray, leaving headroom for a positive surprise.
Key takeaways from the analyst meet
w Delays in core-business projects: RIL announced delays in the commissioning schedule of key core-business projects, indicating (i) start-up of new PX capacity in 2HFY17 instead of earlier guidance of end-FY2016 and (ii) commissioning of petcoke gasification units from end-2QFY17 through 4QFY17 instead of earlier guidance of full commissioning during 1HFY17. However, the company maintained its timelines on commencement of refinery off-gas cracker (ROGC) and ethane import project by 3QFY17. The management indicated that ROGC may start without full ramp-up of petcoke gasification project, as the company may continue to import LNG for its internal requirement until the last of the gasifier units is operational.
w Telecom launch in 3-9 months: The company indicated that the spectrum from RCom will get integrated in next 8-10 weeks, which will set the stage for full-scale launch anywhere in the next 3-9 months. The initial results from employee trial runs have been positive with fairly high usage of data as well as voice minutes.
w R1.13 tn of capital expenditure in FY2016: The company’s gross fixed assets increased by a significant amount of R1.13 tn in FY2016 , with additions of (i) R540 bn in refining and petrochemicals, (ii) R500 bn in the telecom segment and (3) about R50 bn in US shale.
Higher guidance on overall capital expenditure: The management indicated cumulative capital expenditure of $18.5 bn on core-business projects, out of which (i) ~$3 bn has been already capitalised in gross block, (ii) ~$12-12.5 bn is part of capital-WIP and (iii) $3-3.5 bn is the amount remaining to be expensed. In case of telecom, the company indicated a cumulative amount of R1.5 tn, out of which R1.2 tn has already been incurred.
Maintains guidance on incremental contribution from core-business projects: The management maintained its guidance on incremental contribution of $3-3.5 bn from ongoing core-business projects despite reduced economics of (i) petcoke gasification project due to sharp decline in LNG prices and (ii) refinery off-gas cracker (ROGC) due to sustained lower crude prices. The company will indeed have an economic advantage over other players in the downstream industry due to moderate savings on energy costs for its refining segment and lower cost of ethylene production from ROGC as compared to other feedstocks.
Steady refining Ebit driven by strength in margins: Q4FY16 refining segment Ebit remained steady sequentially at Rs 63.8 bn (+35% y-o-y) led by robust refining margins at $10.8/bbl
(-$0.7/bbl q-o-q- and +$0.7/bbl y-o-y) and stable crude throughput. The sequential reduction of $0.7/bbl in refining margins was in line with the decline in Singapore complex margins by $0.2/bbl and contraction of Arab light-heavy differential by $0.5/bbl. RIL’s premium over Singapore benchmark margins moderated to $3/bbl from $3.5/bbl in 3QFY16. Crude throughput was at 17.8 mn tons in Q4FY16 versus 18 mn tonne in Q3FY16 and 16.2 mn tonne in Q4FY15.
Strong petchem profitability driven by higher volumes and robust margins: Q4FY16 petchem segment Ebit increased 5.3% q-o-q to R27.3 bn (+29% y-o-y), reflecting (i) higher volumes led by ramp-up in production of PTA and PET from new plants in Dahej, (ii) increase in Asian polymer margins and (iii) higher realised margins given strength in domestic demand. RIL’s polymer production volumes declined 3.6% q-o-q to 1.14 mn tons in Q4FY16. Polyester production volumes increased 7.7% q-o-q to 0.59 mn tons. Fibre intermediates’ volumes increased 3.2% q-o-q to 1.78 mn tons. Domestic demand for polymer grew robustly by 15% y-o-y and for polyester by 5% y-o-y in FY2016.
—Kotak Institutional Equities