Reliance Industries' Q3FY18 results (Neutral) - Telecom and Petchem drive a strong quarter
Q3FY18 result highlights
- RIL reported consol PAT of Rs94.4bn, ahead of estimates (Rs86.7bn), driven by strong operating results both in petchem and a better than estimated EBIT of Rs14.4bn in the telecom business vs estimates of 11.6bn.
- Reported GRMs of US$11.6/bbl were also marginally ahead of estimates, but reported EBIT of Rs61.6bn was 2% below estimates, driven by lower refining thruput. Petchem EBIT at Rs57.5bn (+74% yoy, IDFCe Rs52.6bn)
- Telecom segment profitable at EBITDA/EBIT/PAT level in second qtr of reporting (Rs69bn/26.3bn/5bn), materially above our estimates (Rs72bn/24.2bn/Rs3.7bn respectively).
- Depreciation/interest costs of Rs43/22.7bn were up 55/154% reflecting the capitalisation of telecom segment capex/debt.
Key positives: Very strong Petchem margins; stellar qtr for telecom.
Key Negatives: E&P remains a laggard; net debt remains elevated, Refining EBIT below estimates
Impact on financials: FY18/19/20E EPS increased 1.4/5.9/9.7% to reflect higher telecom earnings (Exhibit 3) and marginally higher Petchem. TP raised to Rs890/sh.
Valuations & View: Strong earnings, but momentum in the price
With growing momentum on the downstream expansion/margin improvement projects and the stronger performance of Jio, the potential for earnings growth over FY19E is not in doubt, with the substantial volume increase in petchem and margin improvement in both refining/petchem segments and the growth in Jio operating earnings over FY18-19E. The guidance/update by RIL reinforces our assumptions of FY19E seeing a step change in profitability and operating metrics. Having said that, we remain sceptical of any meaningful expansion in RoE/RoCE levels, with the operating profit improvement offset by higher depreciation/interest costs due to the higher capex over FY15-19E and resultant higher debt on the books. Current valuations of 13.4x FY19E EPS/10x EV/EBITDA and 1.7x book value imply an estimated 7.5x EV/E to downstream and 10.7x EV/E being attributed to the telecom business (on FY20E, vs 7.5x -8x for peers), which we believe adequately captures the risk reward in the stock. Reiterate Neutral, with our revised TP implying 4.5% downside.
Reliance Industries is primarily engaged in the production and market of petrochemical products, and refinery and retail of petroleum and LPG. Co.'s petrochemical products include polymer - polypropylene (PP), polyethylene (PE), poly vinyl chloride (PVC); polyester - polyester filament yarn (PFY), polyester staple fiber (PSF), polyethylene terephthalate (PET); polyester intermediates - paraxylene (PX), purified terephthalic acid (PTA), mono-ethylene glycol (MEG); and cracker products - ethylene, propylene and aromatics. Co. is also engaged in the manufacture of RELAB and textiles. Co.'s textile products are sold under the brand names: Only Vimal, Harmony, Reance, RueRel and V2.
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