Reliance Industries Limited - Earnings outlook stable, maintain HOLD - Antique

1QFY14 PAT of INR53.5bn driven by higher Other Income; GRMs, petchem miss estimates

Reliance Industries Ltd (RIL) reported a net profit of INR53.5bn in 1QFY13, up 19% YoY, down 4% QoQ and 2% above our estimate primarily due to higher Other Income of INR25.4bn. EBITDA was 6% below our estimate due to lower petchem earnings. 1Q GRM declined 17% QoQ to USD8.4/bbl due to end of winter demand. Refining EBIT declined 16% QoQ to INR29.5bn while throughput was up 6% QoQ to 17.1mmt due to shutdown in 4QFY13. Petchem EBIT was flat QoQ at INR18.9bn due to weakness in PX, PP and BD segments. Gross KG-D6 gas output fell 20% QoQ to 15.3mmcmd with 23% QoQ EBIT decline to INR3.5bn. Petchem expansions remain on track.

Gas output decline from D1/D3 & MA to be arrested by workovers, facility up-gradation

RIL aims to arrest production decline in existing D1/D3 and MA fields through booster compressor, MEG up-gradation and workovers for which approvals are in place and FEED activities and technical evaluation is in progress. Further a new well, MA8 expected to be drilled soon in MA field along with side-tracking and workover of existing wells which is likely to boost production from the field (2-3mmcmd). However any meaningful output growth beyond 18-20mmcmd is expected post development of satellite fields and MJ-1 reservoir which would lead to output ramp up in FY17-18e.

RIL's E&P outlook positive on MJ-1 discovery, R Cluster FDP approval expected soon

MJ-1 discovery is a significant positive for RIL. As per Niko, most parameters exceed high end pre-drill estimates of 2.6tcf of gas and 176mmbbls of oil. RIL is planning an initial appraisal program of 2-3 wells starting from 2HFY14 subject to approvals and aligned with arrival of 2nd deep water rig. RIL is targeting first gas from MJ-1 by CY19e through accelerated development. Approval for R Cluster development is also expected within 1-2 months. However approval delays may be there in D29, 30, 31 (other satellites) in KG-D6 and NEC-25 where, as per media reports, DGH has rejected the FDP due to lack of DST.

Gas price hike to improve realizations, accelerate upstream activities

With CCEA's approval of Rangarajan formula, RIL's gas realization is estimated to almost double to USD8.4/mmbtu in FY15. The price hike would also increase exploration activity and improve feasibility of deepwater prospects for RIL which is crucial for incremental production. We model our estimates based on gross gas output ramp-up to ~50mmcmd by FY18e which accounts for FDPs under approval like R-series and NEC-25. We have not accounted for MJ-1 in our estimates.

GRMs to remain steady at ~USD9/bbl; Rupee deprecation to push EBIT up further

With strong seasonal summer demand and Asian refinery outages, benchmark Singapore GRMs are currently steady at ~USD8/bbl driven by robust gasoline, diesel and naphtha spreads which form bulk of RIL's product slate. We maintain our USD9.2/bbl GRM assumption for FY14e. RIL expects to commission the petcoke gasification unit by end of CY15 which would result in incremental integrated Jamnagar margins by FY17. We expect petchem performance to remain range-bound in near term as signs of a sustainable recovery are still vague.

Maintain HOLD rating on RIL with a target price of INR916

We maintain our estimates and value RIL in an SOTP basis with INR916/sh target price. The company is positively leveraged to rupee depreciation with a positive EPS sensitivity of 3% to every INR1/USD depreciation. We maintain HOLD.

Source : Equity Bulls

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