Reason for caution on stock as upside from Jio and downstream is priced in but not the execution risks and true net liability.
Reliance’s Q4 earnings were largely in line with our estimate, with refining GRM of $11.5/bbl a slight positive surprise. Timelines for downstream projects were maintained; no new Prime enrollment numbers were revealed for Jio contrary to expectations. Capex remained high at $5.1 bn for the quarter and $17.7 bn for the year, somewhat surprising given likely translation gains due to rupee appreciation. Maintain Hold.
In line Q4 earnings
Reliance’s Q4 standalone Ebitda was largely in line with our estimate. GRM of $11.5/bbl was marginally ahead of our estimate of $11.2/bbl. For the full year FY17, contribution from the subsidiaries declined mainly due to losses in US shale business. Reliance also announced dividend of Rs 11/share.
Capex remains high at $5.1 bn in Q4 and $17.7 bn in FY17
Capex in the quarter remained high at Rs 330 bn including Rs 190 bn in Jio and Rs 120 bn in standalone including downstream projects. This is surprising given we estimate $1 bn+ of translation gains on account of rupee appreciation. As a result, full year capex at Rs 1,147 bn has also been higher than our estimate. Including capex related supplier credit and deferred spectrum liabilities, net liability on balance sheet is $31 bn vs. reported net debt
of $18.4 bn.
Downstream projects on track; no major update on Jio
Timelines for downstream projects were maintained — last phase of PX should start in Q1FY18; ROGC will be commissioned in H1FY18; petcoke gasifiers over 2HCY17; ethane cracker is ready at Dahej and pipelines to Hazira and Nagothane should be completed soon. Reliance guided for 60% of $3 bn Ebitda addition from downstream projects to happen in FY18, though our estimates are more conservative. Contrary to expectations, management did not provide an update over the 72 mn+ Jio prime subscribers shared earlier.
Updating estimates; maintain Hold
We marginally raise our earnings estimates and fair value to reflect higher petrochemical earnings based on FY17 performance. Overall, we remain cautious on the stock as we believe upside from both downstream projects and Jio is adequately priced in but not execution risks and true net liability on balance sheet.
Our price target of Rs 1,252 (Rs 1,210 previously) for Reliance is based on a SOTP of the different businesses and implies 12x FY19e P/E. Key risks are higher/lower downstream profits, positive/negative surprise on Jio and corporate action.
Beat in refining earnings
GRM at $11.5/bbl in Q4 surprised positively vs. our estimate of $11.2/bbl, a premium of $5.1/bbl over Singapore GRM. Management attributed strong refining performance to optimisation of gas oil production relative to jet kerosene, higher domestic sales and utilisation of weaker Brent-Dubai spread.
Timelines for downstream projects maintained
Timelines for downstream projects were maintained. Two trains of PX have been commissioned and the last phase is expected to be started in Q1FY18; ROGC will be commissioned in H1FY18; Petcoke gasifiers will be commissioned in phases over 2HCY17; ethane imports have started into Dahej and pipelines to Hazira and Nagothane are expected to be completed by the end of Q1FY18. Management guided that it expects $3 bn of additional Ebitda from the downstream projects and 60% of this should reflect in FY18 itself. Our estimates are more conservative though – we model $1.2 bn in FY18e and $2 bn in FY19e.
$5.1 bn of capex in Q4
Capex in Q4FY17 remained high at Rs 330 bn including Rs 190 bn on Jio and Rs 120 bn in Reliance standalone including downstream projects. This was somewhat surprising given we expected $1 bn+ of translation gains in the reported capex this quarter due to rupee appreciation. For the full year, capex was Rs 1,147 bn ($17.7 bn) including Rs 700 bn in Jio and Rs 400 bn in Reliance standalone. Management guided that capex in Reliance ex Jio will be less than $2.5 bn in FY18. For Jio capex in Q1FY18 is likely to be similar to Q4 and decline thereafter. As a result, we believe capex in Jio is likely to exceed Rs 300 bn implying total capex of at least $7 bn.
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Reported net liabilities of at least $31 bn at FY17 end
In addition to reported net debt of Rs 1,194 bn, management indicated deferred spectrum liabilities of Rs 224 bn and capex related supplier credit of Rs 610 bn taking total net liability to $31 bn. This compares with $24.4 bn at FY16 end, an increase of $6.7 bn. However we note that the deficit between capex of $17.7 bn and $6.3 bn of operating cash flow implies a deficit of $11.4 bn i.e. another $4.7 bn which has likely been funded by higher working capital.
No major update on Jio; likely to reflect in P&L from Q1/Q2FY18
Contrary to expectations, Reliance did not provide any updated number for its Jio Prime subscribers over and above the 72 million+ shared earlier. Total number of subscribers at March end was 109 million — management indicated that it will provide monthly updates of this to TRAI. Reliance will likely start expensing Jio either in Q1 or Q2FY18. Rs 120 bn write-down on Jio in FY16 Reliance has written down its assets and equity in Reliance Jio by Rs 120 bn in FY16 on account of revaluation of spectrum assets as part of its transition to Ind-AS. Including this, the Rs 1.8 trillion assets in Jio is funded by Rs 470 bn of debt, Rs 700 bn of equity, `410 bn of capex related supplier credit and Rs 220 bn of deferred spectrum liabilities.
1221 fuel pumps operational now
Reliance has operationalised 1221 fuel pumps vs. 1151 at Q3 end. This includes 448 own pumps. The company indicated a market share of 5% in retail diesel sales in March. However this is likely to have been helped by a higher discount that the company was offering – this has been discontinued from April.
CBM to ramp up to 2.5mmscmd
RIL has commenced commercial production from its coal bed methane project in Sohagpur West. Management guided for 2.5 mmscmd of production run-rate by FY18 end and plateau at a higher level 3-6 months thereafter.