margins: We model FY2013e (estimates), FY2014e and FY2015e refining margins at $8.5/bbl, $8.3/bbl and $8.3/bbl. We expect refining margins to be subdued over the next 12-18 months led by (i) net additions of 2.8 mn b/d to global refining capacity in CY2013-14e, (ii) 0.4m b/d of hike in OPEC NGLs (natural gas liquids) supply and (iii) downside risks to incremental oil demand of 2.1m b/d in CY2013-14e from a slowdown in the global economy.
Chemical margins: We model a decline in chemical margins in FY2013e compared with historical levels, which results in lower Ebitda (earnings before interest, taxes, depreciation and amortisation) despite assuming a weaker rupee. However, we expect margins to improve subsequently to reflect gradual improvement in global operating rates and potential recovery in downstream demand.
E&P segment: We model FY2013-15e KG D-6 gas production at 28 mcm/d, 23 mcm/d and 20 mcm/d. Our estimates of gas production from KG D-6 block are comparable with Niko’s estimates. We highlight that Niko has already factored the development of key satellite fields in its estimates and hence, we rule out meaningful upside to the same.
We have assumed gas price of $4.2/m BTU (British thermal unit) over FY2013-14 and $7/m BTU from FY2015. We doubt that the government will increase domestic gas prices beyond $6-8/mn BTU given its negative impact on the price-sensitive power and fertilizer sectors.
Other income: We model RIL’s other income to likely grow strongly over the next few years driven by its increasing cash pile. We expect RIL to generate R677 bn of free cash flow over FY2013-15.
We revise our rating on the RIL stock to Reduce with a 12-month forward SOTP (sum of the parts)-based fair value of R775.
Kotak Institutional Equities