Retail sees profit, at last

High refining margins make up for weakness in petrochem margins

Reliance Industries? (RIL) Q4FY13 profit after tax of R55.9 billion was in line with the estimated R55.4 bn. High gross refining margins (GRMs) of $10.1 per barrel and higher other income offset surprisingly weak petrochemicals margin. With $5.7 billion investment in shale gas so far, FY13 Ebitda (earnings before interest, taxes, depreciation and amortisation) at $483 million and Q4FY13 production of 11.4 million metric standard cubic metre per day (mmscmd) (up 12% q-o-q), our positive view on shale is vindicated. Cash profit of R780 million in the retail business, for the first time, was another significant positive.

We expect robust GRMs to persist as refinery closures offset new capacities. Further, progress in capex?pet coke gasification, off-gas cracker?supports our call of Ebitda doubling in five years. Hence we reiterate ?buy? with a target price of R1,007 apiece.

Outlook and valuations: We expect RIL?s Ebitda to double over the next five years with 90% of the incremental growth coming from non-regulated segments of refining, petchem and shale gas. Of the estimated $33 bn in operating cash flow over FY13-17, we see capex of $28 bn in core segments reviving growth. Our bullishness on refining margins, shale gas growth and retail business turning profitable is playing out. Key triggers include refinery closures, continued rise in US gas prices, upstream FDP (field development plan) approvals and hike in natural gas prices.

Investment theme: We are positive on both refining and chemicals, as global refining capacity closures offset additions, and global utilisation rates have bottomed out in chemicals. RIL is currently in a capex phase, investing in world-scale projects like petcoke gasification and off-gas crackers, which are to drive future growth. Its investment in US shale gas is bearing fruit, and is expected to contribute 12% of Ebitda by FY15.

India upstream KG-D6 block:

* Revised field development plan (RFDP) for currently producing MA field has been approved by the management committee (MC).

MA field production is better than anticipated.

* RFDP for currently producing D1/D3 field submitted in August 2012 and awaiting approval.

* As per management, D1/D3 production will last only for another three-four years on current reserves.

* FDP for R-Series submitted in January 2013

* Front End Engineering Design (FEED) for integrated development of all satellite discoveries is underway

* RIL and BP are planning to invest $5bn over next three-five years to develop 4 trillion cubic feet (tcf) of already discovered fields.

n Well MJ-1 targeting upsides in existing production area underway

NEC-25 block:

* Ministry of defence clearance for this block has been given

* Integrated block development plan for 4 discoveries submitted to MC

* First gas by mid-2019 subject to timely approvals

CBM:

* Expects first gas by FY15

* FEED completed – Initiated contracting process for long lead items

KG-V-D3:

* Declaration of Commerciality for this block has been rejected by DGH as the current gas price is not adequate for commerciality Refining

* Post maintenance shutdown during Q4FY13, RIL?s refining capacity will now rise by 2 million tonnes per annum (mtpa). FY13 capacity of 60mtpa, throughput of 68.5 mtpa, implying utilisation of 114%.

* Key downstream units like Coker and FCC also achieved a record throughput of 19.2 million metric tonnes (mmt) and 21.6 mmt, respectively, during the year.

* Sequentially, gasoline spreads rose $5.2 per barrel, diesel spreads rose $2.1 per barrel, naphtha rose $2.2 per barrel while light-heavy remained high at $4.5 per barrel.

* RIL expects petcoke gasification to add $2.5 per barrel to GRMs.

* GRMs continue to improve in line with our hypothesis that capacity closures will offset capacity additions. As per our estimate, CY12 saw almost no change in net refining capacity, leading to improvement in margins later in the year.

* RIL sees shortage of refining capacity in Asia and expects argin to improve.

Shale gas:

* Production growth remains robust, up 12% q-o-q to 11.4 mmscmd (RIL?s share). This is now more than RIL?s 60% share of KG-D6 gross production of 16 mmscmd.

* Revenue of $616m and Ebitda of $483m in FY13. This is higher than our FY13 Ebitda estimate of $358m. Q4FY13 Ebitda at $155 million was higher 26% q-o-q.

* RIL has invested $5.7 bn across its three shale JVs so far.

* RIL?s carry of its partner?s capex in two of its three assets?Eagle Ford, Pioneer and Marcellus, Carrizo?is complete.

Retail:

* RIL has invested R95 bn in retail so far.

* Retail has turned profitable at the Ebitda level for the first time ever. FY13 Ebitda was R780m versus FY12 Ebitda loss of R3.42 bn.

* Same store growth of 7-18% across formats.

* Currently 1,450 stores operational in India across 129 cities.

Other details:

* Investment in telecom so far of R180 bn.

* Standalone debt at end FY13 of R724 bn and cash of R830 bn. Consolidated debt of R1,008 bn.