Reliance Industries Q3 FY16

CMP: Rs1,043   1‐yr Target: Rs1,200   Upside: 15.1%  BUY

²  Reliance Industries Q3 FY16 performance was ahead of estimates on the back of an strong performance from the refining segment

²  OPM improved 917bps yoy and 199bps qoq to 18.2% in line with our expectations; yoy increase was led by 406bps and 841bps rise in petchem and refining segment EBIT margins respectively

²  US$11.5/bbl GRMs was tad higher than our estimates

²  PAT at Rs. 7,218cr was higher than our estimates due to better than expected refining and petchem performance and higher other income

²  Raise FY16 and FY17 estimates and maintain BUY rating with higher 1‐ year target price of Rs1,200

Result table

	(Rs . cr)	Q3 FY16	Q3 FY15	% yoy	Q2 FY16	% qoq
	Net sales	56,567	80,196	(29.5)	60,817	(7.0)
	Material costs	(37,682)	(63,450)	(40.6)	(41,933)	(10.1)
	Purchases	(949)	(1,951)	(51.4)	(1,134)	(16.3)
	Personnel costs	(1,091)	(832)	31.1	(939)	16.2
	Other overheads	(6,573)	(6,755)	(2.7)	(6,978)	(5.8)
	Operating profit	10,272	7,208	42.5	9,833	4.5
	OPM (%)	18.2	9.0	917 bps	16.2	199 bps
	Depreciation	(2,405)	(2,105)	14.3	(2,372)	1.4
	Interest	(609)	(881)	(30.9)	(694)	(12.2)
	Other income	2,289	2,402	(4.7)	1,617	41.6
	PBT	9,547	6,624	44.1	8,384	13.9
	Tax	(2,329)	(1,539)	51.3	(1,823)	27.8
	Effective tax rate (%)	24.4	23.2		21.7
	Adjusted PAT	7,218	5,085	41.9	6,561	10.0
	Adj. PAT margin (%)	12.8	6.3	642 bps	10.8	197 bps
	Ann. EPS (Rs)	89.1	62.9	41.8	81.1	10.0
	Source: Company, India Infoline Research
	Segmental performance
	Revenues (Rs. cr)	Q3 FY16	Q3 FY15	% yoy	Q2 FY16	% qoq
	Petrochemical	18,031	21,306	(15.4)	19,851	(9.2)
	Refining	49,552	73,152	(32.3)	51,265	(3.3)
	Oil and gas	992	1,347	(26.4)	1,166	(14.9)
	EBIT margins (%)	Q3 FY16	Q3 FY15	bps yoy	Q2 FY16	bps qoq
	Petrochemical	14.4	10.3	406	12.7	168
	Refining	12.8	4.4	841	10.6	222
	Oil and gas	3.9	19.8	(1,589)	4.8	(87)
	Revenue contribution (%)	Q3 FY16	Q3 FY15	bps yoy	Q2 FY16	bps qoq
	Petrochemical	26.2	22.2	404	27.4	(116)
	Refining	72.0	76.1	(406)	70.7	134
	Oil and gas	1.4	1.4	4	1.6	(17)
	EBIT contribution (%)	Q3 FY16	Q3 FY15	bps yoy	Q2 FY16	bps qoq
	Petrochemical	28.6	38.3	(966)	31.3	(269)
	Refining	70.0	55.8	1,420	67.3	267
	Oil and gas	0.4	4.7	(422)	0.7	(27)

Other key highlights

²  Low oil prices and demand for light distillates particularly transportation fuels continue to fuel demand

²  Gasoline demand growth has remained strong in India and China driven by strong record auto sales. Gasoil demand has been strong in Europe and India. Jet kero demand remained strong on the back of increasing miles travelled.

²  Large benefits continue to exist for petcoke gasification project at current LNG prices of US$7.5/mmbtu and pet coke price of $1.5/mmbtu.

²  Highest ever quarterly production of ULSD at 4.2mn tons was achieved in line with strategy to maximize ULSD in view of better realization against 500 ppm diesel

²  The company has opened 762 retail outlets so far and can boast of the largest average throughout per outlet of 200KLPM and aims to double it

²  Domestic marketing volumes ‐ Retail & Bulk reached 2.3 Million KLPA level on exit rate basis in Dec’15

²  With regards to the petcoke gasification project, utilities systems are at start up stage and gasifiers are expected to commence operations from the H2 of CY16. The company has maintained its guidance of US$2.5/bbl to GRM gains from the project in spite of current difficult environment.

Retail segment performance continues to improve

Retail segment revenues for Q3 FY16 were higher by 28.9% yoy. In terms of profitability the segment reported an EBIT of Rs. 147cr as compared to Rs. 133cr in Q2 FY16. PBIDT was at Rs. 243cr up 15.7% yoy. The improvement was on the back of better gross margins across the segments. The company has focused on enhancing its inventory management and has also been able to increase the penetration of its own brands. Benefits of operating leverage and higher contribution of better margin digital and fashion segment provided additional boost to the margins.

Reliance Jio – vast service offerings at ARPUs similar to incumbent players

²  Robust jump in 4G phones sold in the year in India so far.

²  Devices availability has enhanced ecosystem for Jio

²  Voice has been working fine both on volte and WiFi

²  Fibre spread is on target. .. jio centres are present across the country.

²  Extensive testing phase on.

·         Launched services for RIL group employees and family and friends on trial basis

·         More than 60,000 people joined from 1,100 location in India

·         End‐to‐end services being offered

·         Vendors and channel partners also involved

·         Large scale simulation of full services being offered

Maintain BUY

Over the next three years, we believe, these core businesses of refining and petrochemicals will drive a strong 25% CAGR in standalone EBIDTA on the back of commencement of large scale projects ‐ off gas cracker and petcoke gasification.

The petcoke gasification project whereby RIL is investing US$4bn is expected to commence operations in FY17. Commencement of this project will allow RIL to replace expensive RLNG with gas produced from petcoke leading to incremental US$2/bbl GRM (management guidance of US$2.5/bbl). Off gas cracker will provide a consistent low cost supply of feedstock to the petrochemical plants where RIL is increasing its capacity. While the global environment has been moderately improving form GRMs and petrochemical spreads, RIL will outperform the benchmarks by a significant margin.

The domestic E&P segment will continue to reel under pressure of falling production, lower prices and bureaucratic issues. Shale gas too will continue to see pressure as realizations will remain weak. While Telecom business might achieve EBIDTA breakeven in three years considering its asset light model, Retail business will show improved trend in profitability. We are raising our estimates to factor in higher than expected PAT in Q3 FY16. However, P/E valuations of 9.7x on FY17E earnings is much below RIL’s historical average and we believe a re‐rating is due given strong earnings growth profile in the coming years. We maintain BUY with a 1‐year price target of Rs1,200 (raised from Rs1,150 earlier).