Published on 30/01/2018 2:32:50 PM | Source: Motilal Oswal Securities Ltd

Buy Reliance Industries Ltd For Target Rs.1,069.00 - Motilal Oswal

Petchem drives standalone profitability; RJio turns profitable

Reliance Industries’ (RIL) 3QFY18 standalone EBITDA increased 30% YoY (+6% QoQ) to INR137b, below our estimate of INR146b, due to marginally lower throughput of 17.7mmt (our estimate: 18.3mmt). GRM of USD11.6/bbl was in line with our estimate, though. PAT rose 5% YoY (+2% QoQ) to INR84.5b, benefiting from lower interest expense of INR10.9b (our estimate: INR14b – a miss due to forex gain of INR920m) and lower depreciation of INR24.8b (our estimate: INR29b).

* Lower throughput impacts refining performance: Refining EBIT stood at INR60.8b (-1% YoY, -7% QoQ), with GRM of USD11.6/bbl (in-line; +7% YoY, - 3% QoQ) and throughput of 17.7mmt (our estimate: 18.3mmt; -1% YoY, -2% QoQ). GRM premium over Singapore complex stood at USD4.3/bbl.

* Robust volume growth and healthy deltas drive profitability: Petchem EBIT grew 68% YoY (+15% QoQ) to INR56.6b, led by a favorable margin and strong volume growth. EBIT margin of 17% was higher than 15% in 3QFY17, primarily due to the strengthening of PP, intermediates and polyester chain deltas.

* ROGC commissioned: ROGC has been commissioned successfully, and was fully operational in December 2017. It has achieved designed throughput levels during the quarter. Out of the 10 petcoke gasifiers, four are expected to start by March 2018 and the rest in FY19.

* Domestic E&P continues to shrink: E&P EBIT stood at a loss of INR910m v/s a loss of INR1.2b in 3QFY17 and a loss of INR960m in 2QFY18. KG-D6 gas production declined to 5.0mmscmd (-33.5% YoY, -9.6% QoQ). Shale gas production was down to 32.4bcfe (-14% YoY,-3.3% QoQ) due to natural decline and temporary shut-in of wells. CBM production stood at 0.93mmscmd.

* RJio turns profitable in only second quarter: RJio – the company’s digital business – exhibited a strong performance, turning profitable (PAT of INR5b versus -INR2.7b in 2QFY18 and our estimate of -INR1.1b) in only its second quarter of commercial launch. This can be ascribed to its standalone revenue growth of 12% to INR68.8b (4% beat) and EBITDA growth of 82% to INR26.3b (30% beat). RJio recorded an EBITDA margin of 38.2% in its second quarter of commercial launch. This is 440bp higher than Bharti’s India wireless EBITDA margin of 33.8% for 3QFY18 – even at two thirds revenue size compared to Bharti. RJio’s ARPU declined by a meager 1% to INR154; this is despite (our estimate) of 2QFY18 revenue also including ~13% of 1QFY18 revenue. RJio’s subscriber base reached 160m, with 22m net adds and 27m gross adds – of which ~6m are JioPhone additions.

* Valuation and view: Although benchmark GRMs have corrected over the last few days to <USD6/bbl, we believe this is seasonal impact of low gasoline demand in the US. Despite capacity addition, we expect GRM to remain strong due to structurally low utilization in Latin America and Africa, which are home to 12% of global capacity.

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