Reliance Industries (RIL) aims to transform the scale/ scope of its downstream business over the next 15-18 months. A $12 bn investment would nearly double its petchem capacity via a refinery off gas cracker (ROGC) even as the LNG used at its Jamnagar complex is being replaced via a petcoke gasifier. Also,
upstream business could gain traction with regulatory clearances and higher gas prices. We estimate RIL’s consolidated Ebitda (earnings before interest, taxes, depreciation, and amortisation) to increase by 45% over FY13-16e with the downstream expansion, while replacement of LNG by synthetic gas could lend a $1-1.5/bbl (barrel) advantage in GRMs (gross refining margin). At CMP (current market price), we believe the full impact of these expansions is not factored in. Upgrade to Outperformer with a 12-month price target of R1,013.
Benefit of $12 bn expansion to reflect from FY16e: Replacement of the LNG used (8 mmscmd) in refining and use of refinery off-gas to produce 1.4m tpa of additional ethylene could add R130 bn to sustainable Ebitda by FY16e. This, we believe, does not reflect in the current stock price.
n The context – ethylene cash costs drive margins: Post the boom in building capacity in petchem over FY09-11, specifically in the Middle East and China, the cost curves for the industry have shifted downwards for gas-based players. This has been driven by the availability of abundant, subsidised gas in the Middle East. Traditional naphtha crackers in Asia now account for a smaller proportion of the cumulative demand. Competitiveness in the petchem space today is largely a function of feedstock being used in the cracker. Notably, the ME advantage of subsidised natural gas and the low price of US shale gas skew the cost curve for the industry. What has made things difficult for RIL is the decline in production from the Panna Mukta Tapti fields, earlier a source of ‘rich’ gas for the refining+petchem complex at Jamnagar.
To offset this disadvantage, RIL is doing the following:
*Use “off-gases” produced at its two large