Although petchem delivered a beat led by continued improvement in feedstock flexibility, EBITDA was down 6% QoQ.
Reliance Industries (RIL) continued to deliver steady earnings with Q1FY20 consolidated PAT at Rs 101 bn beating estimate by 2.3%. EBITDA at Rs 208 bn (adjusted for gains from Ind-AS 116: Rs 4.8 bn) was broadly in line with estimate. Key highlights: 1) RIL has announced that the Rs 252 bn investment by Brookfield in the tower InvIT will be used primarily for repayment of existing debt; 2) it has expanded coker capacity to leverage IMO, enabling it to convert HSFO into gasoil; 3) refining in Q1FY20 delivered a solid beat on EBITDA (6% above estimate) despite lower GRM (GRM: $8.1/bbl, estimate: $8.3/bbl) due to surge in refinery utilisation; 4) petchem beat estimate by 5% due to ramp-up of cheaper ethane imports replacing costlier naptha and propane; and 5) RJIO’s earnings came in line while capex continues to remain elevated accounting for bulk of the Rs 220 bn invested during the quarter.
With no clarity on start of petcoke gasifier, we revise down refining and petchem earnings (lower polymer margins) leading to 4.5% cut in FY20E EPS for Reliance Industries and 3% cut in target price to Rs 1,652/share (Rs 1,701 earlier). Maintain Buy.
Refining on the path of recovery; petchem remains weak
Although petchem delivered a beat led by continued improvement in feedstock flexibility, EBITDA was down 6% QoQ. Weakness in polymer chain margins continues to persist led by a glut in the US being exported to countries ex China in the light of trade sanctions. Outlook for GRM has improved (Current: $7.4/bbl, Q1FY20: $3.5/bbl) with a significant recovery in gasoline cracks (Current: $9.6/bbl). Diesel cracks have started picking up in anticipation of IMO and RIL is well placed to leverage this.
Investments in telecom/media high
Consolidated capex for 1Q came in at over Rs 220 bn, with 55% accounted for by Jio. Another Rs 60 bn was incurred on coker and upstream. Commercial launch of FTTH, e-commerce and POS devices is expected this year, although the exact timeline remains unclear.
Outlook: Robust refining outlook
We expect GRM to recover to $11.7/bbl by FY21, driving 18% EBITDA CAGR over FY19-21, accounting for a third of incremental EBITDA during the period. We continue to retain ‘BUY/SO’ with SOTP-based TP of Rs 1,652/share (10.4x FY21 EV/EBITDA).