Petchem growth projects on track:
Mechanical completion of Refinery off-gas cracker (RoGC) and Petcoke Gasification (for DTA refinery) has been achieved and pre-commissioning/ start-up activities are in full swing. RoGC is likely to be fully operational in the next 45-60 days. RIL aims to export 20-25% of its volumes initially, which will progressively be brought down to zero to take advantage of strong domestic demand growth. Petcoke gasification (for SEZ refinery) will be mechanically complete soon. RIL will benefit from all downstream projects from Q4FY18.
Gross refining margins (GRM) to remain strong in FY18:
Chinese export quotas of oil products have been cut by 40% in the 1st licensing round for 2017 and China’s internal consumption is slated to grow by 2.5% yoy in 2017. Further, utilization levels of teapot refineries (independent Chinese refineries) have peaked at ~60%. Taking into account these factors, oil products’ exports from China will not continue inundating the Asian markets like it did in 2016. Also, annual global oil demand growth should outpace net refining capacity addition by 0.5 Thousand Barrels Per Day (Mbpd) on an average during 2016-20 which will keep crack spreads (this means the differential between the price of crude oil and petroleum products extracted from it) at robust levels. Moreover, incremental capacity addition in the Middle-East and China to the tune of 1.7 Mbpd has been delayed to 2018 and beyond, which was previously expected to come online in 2016-17.
The management expects GRM to remain strong as net refining capacity addition of 3.4-3.5 mbpd over the next 3 years will lag demand growth of ~5 mbpd. In the medium term too, fuel demand growth of 1.4 mbpd (in CY17) shall surpass refining capacity addition, thereby keeping margins firm. Also, strong demand growth from Asia (especially, India and China) and possible lower refining run-rate in Latin America (Latam) will support GRM.
Reliance Jio to be a game changer:
In the broadband wireless access (BWA) segment, Reliance Jio is targeting 50% market share in terms of revenue with an estimate of industry revenue doubling in 4 years to Rs 3 trillion, backed by multi-fold increase in data consumption. Robust industry growth is a good sign; however, given the hyper competitive scenario post commercial launch will be a challenge. Jio is aiming to capture the maximum number of high paying subscribers.
Jio’s launch has been aggressive with promotional offers over the last 6 months and continued with the same for another 3 months post 31st March 2017. Further, they have been aggressive on the pricing front with the quantum of offerings (free content offerings). Jio already has 72 million prime subscribers (Rs 99/year enrolment fee) while subscribers opting for monthly recharges would be crucial to gauge the annual revenues that Jio would able to garner in the first year. Further, Jio would continue to give lucrative offers to its prime subscribers to restrict churn and committed revenues. Reliance Jio aims to add ~25 million subscribers every month from Q4 FY18 led by sale of Jio phones and conventional subscriber additions.
Favourable Polyester/Fibre margins to offset weak Polymer margin; Capacity addition
will drive incremental EBIDTA:
On the prevailing Asian demand/supply scenario Asian petchem margins are expected to remain stable yoy in FY18. As far as RIL’s petchem margins are concerned, there would be some margin pressure in polymer due to the capacity addition in polymer. However, slower ramp-up in Bharat Petroleum Corporation Limited (BPCL) and ONGC Petro additions Limited (OPAL) will reduce the overall supply glut in FY18. Strong domestic demand and firmed up cotton prices due to drop in acreage would help in maintaining higher spreads between cotton and polyester leading to EBITDA growth in this segment.
Positive free cash flows from FY18 with end of mega capex phase:
RIL had invested heavily in its businesses with a total capex spend of Rs 3,191 bn during FY14-18 versus Rs 810 bn during FY11-13. However, annual capex is estimated to sharply decline to Rs 250 bn in FY19 while the company’s telecom venture and petchem expansion brings in incremental revenue for the company at the same time. Consequently, annual free cash flow generation is expected to be substantial in the period FY18-19E.
The petrochemical industry contributes about 30 percent to India's chemical industry which is likely to become $250 billion by 2020. In this journey, the petrochemicals industry itself is expected to reach $100 billion by 2020 growing at a compounded annual growth rate (CAGR) of about 14 percent, according to a study by the Associated Chambers of Commerce and Industry of India (ASSOCHAM).
India’s broadband penetration is ~121 million subscribers, which is ~10% of the total population base of 1.2 billion and 12% of the total mobile subscriber base of 1 billion. Globally there is a major shift to multimedia. The Ericsson Mobility report forecasts mobile phone data traffic growing at 45% CAGR in CY15‐21. With its relatively low penetration, India could grow faster, as technology becomes available. In addition to fixed and wireless broadband (voice+data) on an all‐IP network, Reliance Jio, RIL’s BWA service, will offer solutions in sectors such as education, healthcare, security, communication, financial services, government‐citizen interfaces and entertainment. RIL aims to integrate Jio’s capabilities with its other consumer‐facing businesses such as retail, media and financial services.
Reliance Industries Ltd (RIL), a Fortune 500 company, is India's largest private sector entity, with a turnover of $66.8 billion and net profit of $3.9 billion as on FY17. Over the years, RIL has grown through backward integration in the energy chain (textiles, petrochemicals (petchem), refining and Exploration & Production (E&P) and is now moving into new areas like organized retail and broadband wireless access (BWA). It operates one of the largest refining capacities of 1.24 mmbbl/d (i.e. million barrels per day) at a single location and is the largest producer of polyester fibre and yarn.
|Profit Before Taxation & Exceptional Items||31114.00||38501.00||40142.00||45039.25||48312.52|
|Exceptional Income / Expenses||0.00||0.00||0.00||0.00||0.00|
|Profit After Tax||23640.00||29625.00||29941.00||33540.62||35162.40|
|Share of Associates||0.00||236.00||-108.00||-102.00||-103.00|
|PAT before minority interest||23640.00||29861.00||29833.00||33438.62||35059.40|
|PAT after minority interest||23566.00||29861.00||29833.00||33438.62||35059.40|
RIL is in the midst of completing its largest ever capex plans in core and non-core businesses. The full benefits of the expansion projects will start to reflect in the P&L by FY19. However, for FY18, Jio would be the key factor to deliver promised results. We expect revenues/PAT to grow at 3.9%/8.4% CAGR over the next 2 years (FY17-19E). We value Reliance Industries at 18.5x FY19E EPS of Rs. 55.36 and recommend a ‘Buy’ with a target price of Rs. 1,030 giving an upside of 20%.