Reliance Industries' Q4FY18 results (Neutral) - Strong Petchem helps offset weaker Refining for the qtr
Q4FY18 result highlights
- RIL reported consol PAT of Rs94.6bn, marginally ahead of estimates (Rs93bn), driven by strong operating results in petchem and a better than estimated EBIT of Rs14.95bn in the telecom business vs estimates of 13.4bn.
- Refining segment disappointed however, with GRMs of US$11/bbl (IDFCe US$11.2/bbl, Q3FY18 US$11.6/bbl) – thruput of 16.7mt was also down 5/6% yoy/qoq, due to a maintenance shutdown.
- Telecom segment missed IDFCe Revenue at Rs71.3bn (est Rs71.6) but EBITDA of Rs26.9bn was broadly in line, with lower than est ARPU offset by higher active subs for the qtr.
- Depreciation/interest costs of Rs48.5/25.7bn were up 7/22% qoq reflecting the capitalisation of telecom segment capex/debt.
Key positives: Very strong Petchem margins and record volumes. .
Key Negatives: E&P remains a laggard; net debt remains elevated, Refining EBIT below estimates, with full commissioning of Petcoke gasifier pushed by two quarters.
Impact on financials: FY19E EPS reduced marginally to factor petcoke gasifier delay – FY20E EPS raised 5% to factor stronger petchem earnings. TP raised to 965/sh.
Valuation & View – earnings strength reflects in the price
With growing momentum on the downstream expansion/margin improvement projects and the strong performance of Jio, the potential for earnings growth over FY19-20E 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 FY19-20E. 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 FY15-20E and resultant higher debt on the books. Current valuations of 14.5x FY19E EPS/10x EV/EBITDA and 1.7x book value imply an estimated 7-7.5x EV/E to downstream and 11x 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 3% 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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