19 April 2019 4QFY19 Results Update | Sector: Oil & Gas Reliance Industries BSE SENSEX S&P CNX 39,140 11,753 CMP: INR1386 TP: INR1431(+3%) Neutral Bloomberg RIL IN Better petrochem offsets poor refining performance Equity Shares (m) 5,922 M.Cap.(INRb)/(USDb) 8765.9 / 126.1 Reliance Industries’ (RIL) standalone EBITDA declined 6% QoQ (+2% YoY) to INR137b 52-Week Range (INR) 1407 / 907 due to a sequential contraction in the refining margin and a fall in petrochem volume. 1, 6, 12 Rel. Per (%) 0/11/34 Despite the YoY increase in EBITDA, almost doubling of interest cost resulted in PBT 12M Avg Val (INR M) 10619 declining by 5% YoY (-5% QoQ). PAT stood at INR85.6b (our estimate: INR84.4b; -2% Free float (%) 53.8 YoY, -4% QoQ). A better-than-expected performance in the non-core segments resulted in consol. EBITDA of INR208b (our estimate: INR192b; +13% YoY, -2% QoQ). Financials & Valuations (INR b) Consol. PAT stood at INR104b (our estimate: INR98b; +10% YoY, flat QoQ). Y/E March 2019 2020E 2021E For the full year, standalone EBITDA stood at INR583b (+13% YoY) due to higher Net Sales 5,671 7,292 7,854 volume and margins in the petrochem segment, despite a weaker performance in the EBITDA 839 942 1,105 Net Profit 398 419 476 refining segment. Consol. FY19 EBITDA stood at INR839.2b (+31% YoY) due to a better EPS (INR) 67.2 70.7 80.3 contribution from the telecom and retail segments. Consol. PAT stood at INR398.4b EPS Gr. (%) 10.4 5.2 13.6 (+10% YoY). BV/Sh. (INR) 653 717 789 Higher-than-expected GRM: GRM stood at USD8.2/bbl (our estimate: RoE (%) 11.7 10.3 10.7 USD8/bbl), as against USD11.0/bbl in 4QFY18 and USD8.8/bbl in 3QFY19; RoCE (%) 9.1 7.7 8.6 throughput was at 16.0mmt (our estimate: 16.8mmt; -4% YoY, -11% QoQ) Payout (%) 10.3 10.3 10.3 due to a planned shutdown in one of the CDUs. Premium over Singapore Valuations P/E (x) 20.7 19.6 17.3 complex stood at USD5.0/bbl. P/BV (x) 2.1 1.9 1.8 Petrochem volumes decline: Petrochem EBIT grew 23% YoY but declined 2% EV/EBITDA (x) 13.0 11.2 9.2 QoQ due to a shutdown in the PP and LDPE units. EBIT margin improved EV/Sales (x) 1.9 1.4 1.3 from 17.2% in 4QFY18 and 17.6% in 3QFY19 to 18.9% in the quarter due to a non-commensurate contraction in margins with respect to prices. On a blended basis, EBITDA/mt stood at USD422 (+10% YoY, +11% QoQ). Estimate change Domestic E&P continues the downtrend: Gas production from KG D6 stood TP change Rating change at 1.82mmscmd in the quarter, down from 1.87mmscmd in 3QFY19. CBM production stood at 0.97mmscmd. RJio’s growth slows down: RJio’s growth momentum slowed relative to the last 3-4 quarters on account of slower subscriber adds (yet estimated to be the only player growing subscribers) and lower ARPUs. Revenue/EBITDA grew at a modest 7% QoQ to INR111.1b/INR43.3b – a miss of 4-5%. Margins stood flat QoQ at 39% (our estimate: 39.3%), as revenue growth was partly offset by higher opex. Subdued EBITDA growth, coupled with a steep 19% QoQ rise in finance cost, led to only a marginal 1% QoQ increase in PAT to INR8.4b (8% miss). Valuation and view nd Our report ‘Weakness ahead in refining and petrochem’ (released on 2 Apr’19) echoes with management’s guidance of expanding supply glut in both refining and petrochem in 1-2 years, which would keep the core sector performance under pressure. Capex intensity remains high with total investment of INR327b in 4QFY19 and INR1,345b in FY19 (+70% YoY). There is no specific guidance on capex. However, the petcoke gasifiers appear to have been commissioned fully, which should decrease capex, at least in the standalone business. Swarnendu Bhushan – Research Analyst ([email protected]); +91 22 6129 1529 Sarfraz Bhimani – Research Analyst ([email protected]); +91 22 7193 4309 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Reliance Industries We value RIL using SOTP. Core segment of refining and petrochem is valued at 7.5x FY21E EV/EBITDA. Peers trade at 5.8-6.0x FY20E EV/EBITDA. RIL’s premium is due to its ability to optimize crude basket, product yield, risk management and multiple feedstock availability for its petrochem segment. We do believe that current valuations of the new-age retail and telecom segments reflect fair value of those businesses, but this is already built in our rich valuations. We reiterate our Neutral stand on the company with a target price of INR1,431, which leaves limited upside from the current levels. RJio’s equity value reduced by 10% to INR230/share on higher debt Strong subscriber growth, high churn seen in incumbents’ subscriber base and the huge opportunity in the feature phone category are indicative of the focus on subscriber growth over ARPU increase. We have subsequently factored in a healthy 8m monthly subscriber adds (v/s 6m earlier) and ARPU of INR126 (v/s INR129 earlier) in FY20. However, we expect the trend to reverse in FY21, when RJio would have reached 406m subscribers and Bharti/VIL’s network capability would have significantly ramped up too, shifting the focus on ARPU growth. Subsequently in FY21, we expect ARPU growth of 10% to INR139 and meager 17m subscriber addition. For FY20, we have revised down our EBITDA estimate by 11% due to an increase in cost attributed to fiber and tower demerger (explained in detail below), but estimate PAT to remain largely unchanged due to a corresponding decline in incremental depreciation. For FY21, we have revised up our EBITDA estimate by 3% and PAT estimate by 2.4x on a low base, given the expectation of a reversal in ARPU trends. However, we must emphasize that our forecast remains fluid as there is yet limited cash flow data available related to the fiber and tower demerger. We have reduced our DCF-based TP to INR230 (v/s INR255 earlier), with implied EV/EBITDA of 19/12x on FY20/21E. The revision in TP is attributed to the debt increase of ~INR600b as the OCPS categorized in equity capital is part of the SPV debt now (considered as part of RJio). On an FY20 basis, the stock trades at 19.6x consol. EPS of INR70.7 and EV/EBITDA of 11.2x. Our SOTP-based fair value stands at INR1,431/share. Maintain Neutral. 19 April 2019 2 Reliance Industries Standalone - Quarterly Earnings Model Y/E March FY18 FY19 FY18 FY19 FY19 Var v/s 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 4QE Est. (%) Net Sales 6,42,170 6,85,320 7,32,560 8,40,370 9,11,590 9,61,670 10,00,960 8,35,970 29,00,420 37,10,190 10,77,074 -22% YoY Change (%) 20.0 15.0 18.5 25.2 42.0 40.3 36.6 -0.5 19.8 27.9 28.2 EBITDA 1,15,890 1,29,830 1,37,440 1,34,250 1,51,540 1,48,920 1,45,070 1,37,040 5,17,410 5,82,570 1,32,647 3% Margins (%) 18.0 18.9 18.8 16.0 16.6 15.5 14.5 16.4 17.8 15.7 12.3 Depreciation 21,580 22,680 24,750 26,790 27,620 27,450 25,860 24,650 95,800 1,05,580 26,580 -7% Interest 7,880 13,140 10,940 14,600 21,380 24,170 24,050 27,910 46,560 97,510 18,818 48% Other Income 19,180 20,570 16,240 26,210 20,680 20,120 24,560 28,830 82,200 94,190 27,394 5% PBT 1,05,610 1,14,580 1,17,990 1,19,070 1,23,220 1,17,420 1,19,720 1,13,310 4,57,250 4,73,670 1,14,643 -1% Tax 23,650 31,930 33,450 32,100 35,020 28,830 30,440 27,750 1,21,130 1,22,040 30,257 -8% Rate (%) 22.4 27.9 28.3 27.0 28.4 24.6 25.4 24.5 26.5 25.8 26.4 Adj PAT 81,960 82,650 84,540 86,970 88,200 88,590 89,280 85,560 3,36,120 3,51,630 84,386 1% YoY Change (%) 8.6 7.3 5.4 6.7 7.6 7.2 5.6 -1.6 7.0 4.6 -3.0 Margins (%) 12.8 12.1 11.5 10.3 9.7 9.2 8.9 10.2 11.6 9.5 7.8 Consolidated - Quarterly Earnings Model Y/E March FY18 FY19 FY18 FY19 FY19 Var v/s 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 4QE Est. (%) Net Sales 8,34,710 9,14,810 9,98,100 11,69,150 12,87,560 14,33,230 15,63,970 13,86,590 39,16,770 56,71,350 16,09,848 -14% YoY Change (%) 28.4 20.1 25.7 37.8 54.3 56.7 56.7 18.6 28.3 44.8 37.7 Total Expenditure 7,09,170 7,59,160 8,22,220 9,84,460 10,80,950 12,22,150 13,50,800 11,78,270 32,75,010 48,32,170 14,18,091 -24% EBITDA 1,25,540 1,55,650 1,75,880 1,84,690 2,06,610 2,11,080 2,13,170 2,08,320 6,41,760 8,39,180 1,91,757 9% Margins (%) 15.0 17.0 17.6 15.8 16.0 14.7 13.6 15.0 16.4 14.8 11.9 Depreciation 30,370 42,870 45,300 48,520 51,730 52,290 52,370 52,950 1,67,060 2,09,340 54,017 -2% Interest 11,190 22,720 20,950 25,660 35,500 39,320 41,190 48,940 80,520 1,64,950 39,826 23% Other Income 32,250 23,310 22,180 22,030 17,780 12,500 24,600 31,470 99,770 86,350 38,455 -18% PBT 1,16,230 1,13,370 1,31,810 1,32,540 1,37,160 1,31,970 1,44,210 1,37,900 4,93,950 5,51,240 1,36,369 1% Tax 25,440 32,400 37,750 37,870 42,410 36,490 40,690 34,310 1,33,460 1,53,900 38,837 -12% Rate (%) 21.9 28.6 28.6 28.6 30.9 27.7 28.2 24.9 27.0 27.9 28.5 Reported PAT 90,790 80,970 94,450 94,590 94,850 95,490 1,03,760 1,04,270 3,60,800 3,98,370 97,532 7% YoY Change (%) 28.3 12.8 25.5 17.5 4.5 17.9 9.9 10.2 20.9 10.4 3.1 Margins (%) 10.9 8.9 9.5 8.1 7.4 6.7 6.6 7.5 9.2 7.0 6.1 Key assumptions Refining throughput 17.5 18.1 17.7 16.7 16.6 17.7 18.0 16.0 70.0 68.3 16.8 (mmt) GRM (USD/bbl) 11.9 12.0 11.6 11.0 10.5 9.5 8.8 8.2 11.6 9.3 8.0 Petchem sales (mmt) 2.4 2.6 2.8 3.1 3.1 3.3 3.5 3.1 10.9 13.0 3.4 Petchem (EBITDA/mt) 329 355 380 382 447 408 379 422 362 414 379 E: MOFSL Estimates 19 April 2019 3 Reliance Industries Exhibit 1: RIL segment-wise performance snapshot (standalone) FY18 FY19 4QFY19 (%) In INR b 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q YoY QoQ Segmental Revenues Petchem 241 268 325 368 390 430 453 414 12.5 -8.7 Refining 589 593 638 743 814 815 889 688 -7.4 -22.6 Oil