Edelweiss Research: 'Braveheart Series' Reliance Industries - Upbeat on Downstream; Result Update Q4FY15; Buy

Reliance Industries (RIL) clocked record numbers with Q4FY15 consolidated PAT at INR63.8bn (up 9% YoY, 21% QoQ), 6% ahead of our estimate. GRMs jumped to USD10.1/bbl due to lower oil price and higher crack spreads. Polymer and polyester deltas have normalised following sharp spurt in Q3FY15. Key upcoming projects, petcoke gasification and off-gas cracker remain competitive even at low oil prices. While shale earnings have taken a toll, investment in telecom further increased to INR850bn. Management remained upbeat on fuel retail prospects. We raise our SOTP-based TP 3% to INR1,146 owing to upcoming petcoke and off-gas cracker units and reiterate ‘BUY’ riding compelling valuations.

GRM highest in 3 years aided by flexible crude processing

RIL’s GRM expanded USD2.8/bbl QoQ to USD10.1/bbl (USD9.8/bbl estimate) on firm naphtha and gasoline cracks. Premium over Singapore GRM widened to USD1.6/bbl (USD1/bbl in Q3) on flexibility in crude processing and products grade. Refining EBIT spurted 20% YoY and 48% QoQ despite lower throughputs. RIL restarted retailing diesel domestically at 320 gas stations and is planning to restart all its 1,400 pumps in FY16.

Petrochemical spreads, prices normalise; EBIT down 3% QoQ

Polymer and polyester prices fell during the quarter, adjusting to lower feedstock/intermediate costs ‘with a quarter lag’. Polymer and polyester margins, therefore, fell QoQ, but improved YoY. RIL’s massive petchem start ups are likely to coincide with an estimated domestic demand revival in FY16. Global consultant, IHS, forecast 100bps rise in utilisation rates to 89% as capacity start ups get delayed. Upcoming off-gas cracker will be in top decile of the cost curve, while ethane imports from US will kick start in FY18, which will halve ethylene cost.

Outlook and valuations: Volume-driven surge; maintain ‘BUY’

We have cut FY16/FY17E earnings ~5% each due to higher telecom start up losses, wherein RIL has already invested INR850bn. However, long-term earnings drivers remain intact with the commissioning of petcoke gasification and off-gas cracker units in FY16 end. The stock is currently trading at 8.1x FY17PE. We reiterate ‘BUY/SO’ with revised target price of INR1,146 (INR1,110 earlier) as the stock is at an all-time low PB of 1x FY16E even as its USD30bn capex roll out is set to double profits over 5 years.

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