MOSL: RELIANCE INDUSTRIES (Buy)-Latin touch-Higher refining margins to sustain

​RELIANCE INDUSTRIES: Latin touch; Higher refining margins to sustain

(RIL IN, Mkt Cap USD86.6b, CMP INR875, TP INR1077, 23% Upside, Buy)

• We had talked about the worsening refining glut in our thematic report, The Three Musketeers, January 2017. While we continue to believe capacity addition would remain strong, especially in low cost condensate splitters, utilization of the Latin American refineries does not appear to be improving any time soon. This would enable RIL to continue clocking GRM of ~USD11.5/bbl during FY19-20.
  
• Additionally, delays in upcoming ethylene crackers in the US are also likely to result in higher petchem deltas. We expect EBITDA/mt of USD300 for RIL during FY19-20.
  
• RJio’s revised plans are priced ~15% higher, with an average ARPU of INR150 for its popular unlimited price plans. We expect actions towards ARPU accretion to drive ARPU of INR156 in FY18 and INR172 in FY19.
  
• Latin touch to refining – margins to remain strong at USD11.5/bbl
  
• Argentina, Mexico, Brazil and Venezuela have all been facing severe under-utilization of their refining assets. There is a mismatch between domestic crude availability, refining configurations, and domestic-market product requirements. Additionally, the refineries have not been upgraded for long, which results in frequent maintenance requirements and shutdowns.
  
• Utilization in Mexico and Venezuela has been at 40% in the recent months. Utilization in Argentina at 76% is the lowest since 1996. Utilization in Brazil at 74.3% is also the lowest in six years.
  
• Such lower utilization in these four countries alone, home to 6% of global capacity, would boost refining margins. Additionally, Africa with another 6% of global refining capacity, has also been witnessing utilization of below 70% since 2011. Expect USD11.5/bbl of GRM for RIL in FY18-20.