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Reliance Industries shares rating: 'Buy', says Deutsche Bank

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SummaryReliance Industries focusing on monetising undeveloped discoveries.

Higher other income supports Q1 net profit : * Reliance Industries (RIL) reported Q1FY14 net profit of Rs 53.5 bn (+20% year-on-year, -4.2% quarter-on-quarter), in line with our estimates and marginally above consensus. Ebitda (earnings before interest, taxes, depreciation and amortisation) at Rs 70.8 bn (+5% y-o-y, -10% q-o-q) was, however, below our estimates due to lower- than expected petchem profits, higher other expenses at Rs 63 bn (+9% y-o-y, +11% q-o-q) and higher staff cost at Rs 9 bn (+6% y-o-y, +13.5% q-o-q).

Gross refining margins (GRM) increased 10.5% y-o-y to $8.4/bbl (-17% q-o-q), plus $1.9/bbl (barrel) over Singapore complex margins. As on 30 June 2013, on a standalone basis, RIL had net cash and cash equivalents of Rs 931 bn ($15.7 bn). Reliance Industries also had consolidated net debt of Rs 1,170 bn ($19.7 bn).

Other income contribution to pre-tax profits increased to 38%: In Q1FY14, RIL reported its highest ever other income of Rs 25.4bn (+33% y-o-y, +13% q-o-q), implying a contribution of 38% to pre-tax profit. We expect other income contribution to remain elevated as cash balances are likely to remain high despite the planned capex spend. Cash and cash equivalents (standalone) currently stands at Rs 931 bn ($15.7 bn).

Segment performance: The quarter was marked by an improved performance in downstream (refining and petrochemicals) business, offset by a weaker performance in upstream oil & gas business. E&P (exploration and production) business reported lower Ebit (earnings before interest and taxes) due to an ongoing decline in production. KG D6 gas production in Q1FY14 fell further to 15.5mmscmd (- 52% y-o-y, -19.5% q-o-q) and is currently around 14mmscmd (million metric standard cubic metre per day). Refining segment reported an improved performance driven by higher refining margin of $8.4/bbl (+10.5% y-o-y) and rupee depreciation.

Refining: GRM up 10% y-o-y driven by higher premium over regional benchmark: RIL reported Ebit of Rs 29.5 bn (+37% y-o-y, -16% q-o-q) driven by higher GRM of $8.4/bbl (+10.5% y-o-y) and a weaker Indian rupee (average 56 during Q1FY14, +3% y-o-y). Refining throughput was 17.1mmt (-1.2% y-o-y, +6% q-o-q).

The company is implementing the petcoke gasification plant with capex of $4bn. We estimate this plant to add $3/bbl to RIL’s refining margin by replacing the high cost LNG with synthetic gas produced from petcoke. The project is likely to be completed by FY16. The company has completed basic engineering for the project and envisages proceeding

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