With a 350 bp higher ROCE than Asian energy peers and a focus on balance sheet deleveraging, we find the valuation attractive.
Confidence in earnings should rise with higher refining margins as we count down to IMO 2020. Lower taxes and cheaper gas feed costs should de-risk outlook and boost earnings CAGR to ~17% FY19-21e — top quartile among global oil majors. Maintain top pick. Rising clarity on 2020 growth; top pick in south Asia: RIL’s earnings growth is starting to be derisked as headwinds of H1 2019 turn and become key tailwinds in 2020: Refining margins rise with improved demand and slower capacity growth; cheaper gas costs and improved margins from a slowdown in petrochemical capacity growth in 2020, in particular for polyethylene, supporting the rise in chemical margins; and telecom subscriber adds remain steady. There is an increased evidence of these factors playing out, which should raise investor confidence on the 17% EPS growth we expect over FY19-21.
Count down to IMO; refining key for RIL as it drives a 50%-plus earnings growth until FY21e: As one of the most complex refiners, RIL should be the biggest beneficiary in Asia from IMO regulations to start in January 2020. As shippers prepare for IMO, Asian refining margins have risen and diesel, which forms nearly half of RIL’s refined product output,has seen near-record high margins. Our proprietary margin tracker highlights a ~30% QTD rise in RIL’s refinery margins and we estimate a 27% CAGR in refining Ebitda by FY21. We factor in these trends and cheaper LNG costs in our FY20-22e Ebitda/bbl and raise them 2-6%.
Impact of corporate tax rate reduction: We estimate a ~400bp reduction in the consolidated tax rate RIL’s businesses paid in FY19 of 29-35%, much higher than the new corporate tax rate of 25.2%. RILalso has deferred tax liabilities of $6.5 billion as of FY19, which could reduce with a lower tax rate. Top quartile growth vs peers: RIL’s energy earnings CAGR of 13% over FY19-21 is among the highest vs global integrated oils and Asian peers. With a 350 bp higher ROCE than Asian energy peers and a focus on balance sheet deleveraging, we find the valuation attractive. We raise our PT to Rs 1,469.