Neutral on Reliance Industries - 4QFY12 Results Update - Motilal Oswal

RIL reported 4QFY12 EBITDA and PAT were largely in-line. Reported EBITDA stood at INR65.6b (-33% YoY, -10% QoQ) and PAT stood at INR42.4b (-21% YoY, -5% QoQ). Full year FY12 PAT is down marginally by 1% to INR200b.

- Reported segmental EBIT at INR48.2b was higher than our estimate of INR45.4b. The impact of lower E&P EBIT, due to higher D,D&A was more than compensated by higher refining EBIT led by higher GRM and higher petchem EBIT led by higher polyester volumes. Other income contribution to PBT reached 28% (net of interest expense) and 42% (gross basis) in 4QFY12.

- RIL's 4QFY12 GRM stood at USD7.6/bbl (v/s estimate of USD6.5/bbl) led by strong QoQ jump in gasoline/naphtha margins. RIL reported marginal premium of USD0.1/bbl to restated benchmark Reuters Singapore GRM as against a discount of USD1.1/bbl in 3QFY12.

- E&P: Management guided for 14% decline in KG-D6 reserve on account of reassessment. New reserve numbers will be disclosed in FY12 annual report. RIL has received government approval to conduct pre-development activities, and ~6 months later, RIL will be finalizing integrated development of all its KG-D6 discoveries. If RIL receives government approvals on time, then incremental gas is likely to start flowing in next 2.5-3 years. However, gas price increase (market linked) will also be critical for RIL to commit further investments.

- Cutting estimates; further downside likely to our FY13 estimates: Owing to reserve downgrading, we are increasing E&P D,D&A resulting in FY13/FY14 EPS decline of 4%/1%. Quarterly PAT required in FY13E stands at INR47.6b v/s 4QFY12 PAT of INR42.4b. We believe that there remains a downside risk to our FY13 estimates led by our higher GRM assumptions of USD8.3/bbl in FY13E v/s RIL's latest reported GRM of USD7.6/bbl.

- Valuation and view: We are reducing our SOTP value to INR785/share (earlier at INR800/share). Earnings pressure across segments is likely to continue in the medium term, and EPS accretive cash deployment continues to remain a challenge for the company. On FY13E basis, the stock trades at 11.4x Adj EPS of INR64.2 and EV/EBITDA of 7.7x. We maintain Neutral due to concerns on RoE reaching sub-12%, falling KG-D6 volumes and increased share (75%) of cyclical refining and petchem businesses.

Source : Equity Bulls

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