RESULT UPDATE

RELIANCE INDUSTRIES
Strong petchem show; FCF turnaround in sight
India Equity Research| Oil, Gas and Services

COMPANYNAME

Reliance Industries (RIL) Q2FY17 consolidated PAT of INR72bn (+43%

YoY, +1% QoQ) was in-line, driven by 15% better-than-expected petchem
EBIT, and lower net interest costs. But GRM, at USD10.1/bbl, came 3%
below estimate due to absence of inventory gains. Robust petchem
performance was led by higher volumes and better polyester margins. As
expected, capex fell sharply by 36% QoQ as mega capex programme of
USD42bn is nearing completion, which will turn FCF sharply positive. We
believe structural revival in downstream margins will double profits over
6 years and raise RoE by 400bps. Maintain BUY.

GRM slightly lower; petrochemical strong

Refining EBIT fell 10% QoQ as GRM declined 12% QoQ, while throughput was in-line at
18MMT. Although RIL maximised higher spread diesel production to counter weakness
in gasoline, its spread over Singapore complex declined QoQ from USD6.5/bbl to
USD5.0/bbl. Petchem EBIT (+19% QoQ, +36% YoY) was 15% ahead on higher volumes
(+5% QoQ) and strong margins in polyester (POY +13% QoQ) and PVC (+13% QoQ).
Commissioning of core projects (USD18.5bn) is on schedule (gasification in Q1-Q3
FY18, off-gas cracker in Q4FY17, US ethane in Q4FY17 and PX in 3 weeks).

RJIO targets INR300-500 ARPU, strong content ecosystem

In our recent report (Reliance Industries - Betting big on integrated play stratagem),
we had highlighted that RJIO is building a strong content ecosystem, a significant value
creation compared to traditional services. All 12 RJIO apps are ranked among top 15 in
Playstore and Appstore and have achieved 50% plus share of data market. According to
RJIO head, target ARPU is INR300-500 versus our FY19 estimate of INR167, which we
believe could lead to 35-87% EPS upside (refer table 2). RJIO head also highlighted that
content cost is low and fixed for 12-24 months. Management further clarified that they
have incurred capex of INR1.58tr this far and the recently stated capex target of
INR2.5tr is purely visionary and shall be driven entirely by profit motive.

EDELWEISS 4D RATINGS
Absolute Rating

BUY

Rating Relative to Sector

Outperform

Risk Rating Relative to Sector

Medium

Sector Relative to Market

Underweight

MARKET DATA (R: RELI.BO, B: RIL IN)

CMP

: INR 1,088

Target Price

: INR 1,401

52-week range (INR)

: 1,130 / 888

Share in issue (mn)

: 3,242.4

M cap (INR bn/USD mn)

: 3,526 / 52,776

Avg. Daily Vol.BSE/NSE(000) : 3,976.7

SHARE HOLDING PATTERN (%)
Current

Q3FY16

Q2FY16

Promoters *

45.1

45.1

45.2

MF's, FI's & BKs

13.0

13.0

12.8

FII's

19.7

19.7

19.5

Others

22.2

22.2

22.5

* Promoters pledged shares

(% of share in issue)

NIL

PRICE PERFORMANCE (%)

Stock

Nifty

EW O & G
Index

1 month

1.2

(0.9)

9.3

3 months

6.3

1.6

17.9

12 months

13.7

5.3

31.3

Outlook & valuations: Capex conclusion to drive turnaround; BUY

Following conclusion of RILs ongoing mega capex programme, we expect FCF to
turnaround and RoE to rise. The stock is inexpensive at 1.1x FY17E P/BV RIL earns
healthy RoE of 10.7% even with half its balance sheet as capital work-in-progress. We
reiterate BUY/SO, with a SoTP-based TP of INR1,401, highest on the Street.
Financials (Consolidated)
Year to March

(INR bn)

Q2FY17 Q2FY16

YoY %

Q1FY17

QoQ %

FY17E

FY18E

2,765

FY16

3,006

3,387

443

484

572

Net revenue

762

709

7.4

650

17.2

EBITDA

112

93

20.2

112

(0.4)

71

1.3

278

276

299

24.1

1.2

94.4

93.7

101.5

Diluted P/E (x)

11.5

11.6

10.7

EV/EBITDA (x)

10.3

10.3

8.5

ROAE (%)

11.9

10.7

10.7

Adjusted Profit
Adjusted Diluted EPS

72

50

24.4

31.7

43.1
(23.0)

Edelweiss Research is also available on www.edelresearch.com,

Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Jal Irani
+91 22 6620 3087
jal.irani@edelweissfin.com

Yusufi Kapadia
+91 22 4063 5407
yusufi.kapadia@edelweissfin.com

Vivek Rajamani
+91 22 4040 7415
vivek.rajamani@edelweissfin.com

October 20, 2016

Edelweiss Securities Limited

Oil, Gas and Services

FCF to turn positive as mega capex tapers
Following conclusion of RILs ongoing mega capex programme of ~USD42bn, we expect FCF
to turn positive. With rollout of RJIO, capex intensity in the telecom venture will also come
off sharply. We believe as capex tapers gradually, cash flows from operations will bolster
with commissioning of core projects.

100.0

480.0

80.0

360.0

60.0

240.0

40.0

120.0

20.0

Capex outlay

FY25E

FY24E

FY23E

FY22E

FY21E

FY20E

FY19E

FY18E

FY17E

0.0

FY16

(%)

600.0

FY15

(INR bn)

Chart 1: We believe capex intensity in telecom will come off sharply post roll-out

0.0

Proportion of Jio assets (RHS)

Source: Company

1,000

800

600

540

200

280

(200)

20

(600)

(240)

(1,000)

(INR bn)

(INR bn)

Chart 2: With mega capex cycle coming to an end, we expect FCF to revive

(500)
FY14

FY15

Operating cash flow

FY16

FY17E
Capex

FY18E

FY19E

FCFF (RHS)

FY20E
FCFE (RHS)
Source: Company

EPS upside of 35% for lower range of telco target ARPU

We have run sensitivity of RILs EPS to RJIOs APRU and subscribers. For FY19, we are
assuming ARPU of INR167 and 125mn subscribers. As per the telecom head, RJIO targets
ARPU in the range of INR300-500, which implies FY19 EPS upside of 35-87%.

Edelweiss Securities Limited

Reliance Industries

ARPU

Table 1: Change in FY19 consolidated EPS (INR/share)

Subscribers (mn)
106
90
110
125
150
150
98.6
100.0
101.0
102.8
167
102.7
104.5
105.8
108.1
200
110.3
112.9
114.8
118.2
300
133.5
138.7
142.5
149.0
400
156.8
164.4
170.1
179.8
500
180.0
190.2
197.8
210.6

200
106.2
112.6
124.8
161.9
199.1
236.2

250
109.6
117.2
131.4
174.8
218.3
261.7

200
0.4
6.4
17.9
53.0
88.1
123.2

250
3.6
10.7
24.2
65.2
106.3
147.4

ARPU (INR)

Table 2: % increase in RILs FY19 EPS

150
167
200
300
400
500

90
(6.8)
(3.0)
4.2
26.2
48.1
70.1

110
(5.5)
(1.3)
6.7
31.1
55.4
79.8

Subscribers (mn)
125
150
(4.5)
(2.9)
0.0
2.2
8.5
11.7
34.7
40.8
60.8
70.0
86.9
99.1

Source: Edelweiss research

RJIO launched: Ushers in new digital era

The quarter marked launch of RJIOs 4G services w.e.f. September 5, 2016. As part of Jios
welcome offer, users have access to unlimited LTE date and national voice, video and
messaging along with full bouquet of Jios applications and content free of cost up to
December 31, 2016. Furthermore, the entire bouquet which is worth an annual subscription
of INR15,000 will be free for existing users till December 2017.
Initial response: Jios welcome offer met with overwhelming initial response. Record 16mn
subscribers signed into Jios ecosystem in the first month itself, creating a world record. Jio
cinema has become the second most popular cinema app, while all of Jios 12 applications
are among the top-15 downloads on Playstore and Appstore.
Welcome offer to be extended?: The company could consider extending the duration of
free services given that call failures on Jios network continues to be severe (75 failures in
100 call attempts) given inadequate release of Points of interconnection by incumbent
operators.
Target ARPU of INR300-500: Jio targets to achieve blended ARPU of INR300-500 with larger
focus on middle class customers. Post launch, Jio has already achieved >50% share in data.
Spectrum auctions: Jio has further augmented its network by way of acquisition of rights to
use 269.2MHz spectrum across 22 service areas for INR137bn. Current capacity is capable of
taking even higher loads. Going ahead, Jio will augment its capacity in terms of fibre optic
cables and last mile connectivity. Jios asset base post the spectrum auction stands at
INR1.6trn.

Edelweiss Securities Limited

Oil, Gas and Services

Chart 3: Data usage in India is abysmally low versus other Asia-Pacific countries
3,500

(MB)

2,800
2,100
1,400

700

India

APAC
Average

Phillipines

Thailand

Indonesia

Malaysia

Taiwan

Korea

Japan

Singapore

Source: TRAI performance indicator, Company

Chart 4: Data tariff in India is quite expensive when adjusted for per capita income
5.0

(%)

4.0
3.0
2.0
1.0

Russia

Hong Kong

United States

South Korea

United
Kingdom

Spain

Malaysia

Brazil

Indonesia

China

India

Nigeria

0.0

Source: Analysis Mason, Company

Edelweiss Securities Limited

Reliance Industries
Refining: Subdued GRMs offset by higher throughputs
RIL reported subdued refining performance, with GRMs coming 3% below our expectations.
Refining EBIT, at INR60bn, was up 10% YoY but down 9% sequentially.
Key highlights:

GRM stood at USD10.1/bbl (our estimate: USD10.4/bbl) compared to USD11.5/bbl in

Q1FY17 and USD10.6/bbl in Q2FY16.

Throughput, at 18MMT (16.8MMT in Q1FY17, 17.1MMT in Q2FY16), implied utilisation

of 116% (109% in Q1FY17). Throughput improved sharply post the ~1 month shutdown
in 1 of its 4 CDU units at Jamnagar in Q1FY17.

GRM premium over Singapore benchmark moderated to USD5/bbl versus USD6.5/bbl

in Q1FY17 and USD4.3/bbl in Q2FY16. The sequential dip can be attributed to absence
of inventory gains as oil remained flat versus Q1FY17.

While gasoil cracks improved on winter stock piling, seasonally weaker demand from
India and China continued to weigh on cracks. Domestic gasoline demand remains
robust, but oversupply led by Chinese exports impacted gasoline spreads.

Export volumes of refined products remained unchanged YoY at 11.1MMT. The

company currently operates over 1,100 fuel retail outlets which are running at 30-40%
higher throughputs versus the industry average.

Petcoke facility will get commissioned in phases by Q2FY18 and is expected to be fully
commissioned in FY18.

Reported qtly refining throughput

(USD/bbl)

Q217

Q416

Q216

0.0
Q415

10.0
Q215

2.5

Q414

12.0

Q214

5.0

Q413

14.0

Q213

7.5

Q412

16.0

Q212

10.0

Q411

18.0

Q211

(MMT)

Chart 5: Refining GRMs dipped sequentially to USD10.1/bbl (USD11.5 in Q1FY17)

20.0
12.5

Reported qtly GRMs - RHS

Source: Company, Edelweiss research

Edelweiss Securities Limited

Oil, Gas and Services

Refining EBIT

RIL GRMs (USD/bbl)

Singapore GRMs (USD/bbl)

120.0

105.0

15.6

90.0

12.4

75.0

9.2

60.0

6.0

45.0

Refinery throughput

Chart 8: Naphtha cracks declined sharply QoQ

8.0

Q2FY17

Q4FY16

Q2FY16

Q4FY15

Q2FY15

Q4FY14

Q2FY14

Q4FY13

Q2FY13

Q4FY12

Q2FY12

Q4FY11

Q2FY11

(%)

18.8

Q4FY10

(mn tonnes)

Chart 7: Refinery throughput at 18MMT and capacity utilisation at 116%

22.0

Capacity utilisation (RHS)

Chart 9: Diesel cracks improved while gasoline dipped QoQ

24.0

1.6

19.6

Naphtha cracks

Fuel oil

Gasoline cracks

Q2FY17

Q4FY16

Q2FY16

Q4FY15

Q2FY15

Q4FY14

Q2FY14

Q4FY13

Q2FY13

Q4FY12

Q2FY12

Q2FY17

Q4FY16

Q2FY16

Q4FY15

Q2FY15

Q4FY14

Q2FY14

Q4FY13

2.0

Q2FY13

(24.0)
Q4FY12

6.4
Q2FY12

(17.6)

Q4FY11

10.8

Q2FY11

(11.2)

15.2

Q4FY10

(USD/bbl)

(4.8)

Q4FY11

(USD/bbl)

(USD/bbl)

Q2FY17

Q4FY16

Q2FY16

Q4FY15

0.0
Q2FY15

0.0
Q4FY14

4.0

Q2FY14

15.0

Q4FY13

8.0

Q2FY13

30.0

Q4FY12

12.0

Q2FY12

45.0

Q4FY11

16.0

Q2FY11

60.0

Q4FY10

(INR bn)

Chart 6: RILs premium versus Singapore GRMs at USD5/bbl (USD6.5/bbl in Q1FY17)

75.0
20.0

Diesel cracks

Source: Company, Edelweiss research

6

Edelweiss Securities Limited

Reliance Industries
Table 3: Product cracks and GRMs
Asian Product Crack (USD/bbl)
Naphtha
Gasoline
Jet/Kero
Gasoil
Fuel Oil
AL-AH Diff
Brent-Dubai
Singapore GRMs
RIL GRMS

Q2FY17
(1.9)
11.6
11.1
11.0
(5.1)
2.9
2.4
5.1
10.1

Q1FY17
0.7
14.5
11.1
10.5
(9.5)
2.8
2.4
5.0
11.5

% QoQ
NM
-20.0%
0.0%
4.8%
NM
3.6%
0.0%
2.0%
-12.2%

Source: Company, Edelweiss research

Petrochemicals: Higher volumes, strong polyester margins drive beat

The segment clocked best-ever performance with record EBIT of INR34bn (up 22% YoY, 36%
QoQ) and 15.2% EBIT margin (versus 13.5% margin in Q1FY17 and 11.9% in Q2FY16).
Earnings were driven primarily due to higher volumes of fibre intermediates and polyester
products, robust domestic demand across segments and strong polyester and PVC margins.
RILs polymer production was up 3% to 2.3MMT due to PVC and polymer demand surging
20% and 11% YoY. PVC demand was driven by strong off-take from downstream convertors,
while PP demand was supported by good demand from raffia packaging, filament and
appliance segment demand.
Stable PX prices supported higher delta of USD404/MT. PTA markets were steady,
supported by lack of spot cargo availability as majority volumes were committed in futures
warehouses. Polyester markets remained stable as operating rates in China remained high
to offset any production loss on account of the G20 summit.
Domestic polyester markets witnessed robust demand growth of 14% YoY during Q2FY17.
Polyester filament yarn lifting was healthy for grey and finished fabrics during the quarter.
PET domestic demand witnessed 28% surge YoY on higher beverage consumption.
RILs PTA and PET plants clocked higher operating rates as water quality issues at Dahej
were resolved, resulting in higher polyester chain output. Reliances fibre intermediate
production in Q2FY17 grew 19% YoY to 1.76MMT, while polyester production output gained
9% to 0.6MMT.
Textile exports will benefit from governments support through the Merchandise Exports
from India Scheme (MEIS).

Edelweiss Securities Limited

Oil, Gas and Services

Chart 10: Polyester prices have high correlation (75%) with cotton
400
320

(x)

240
160
80

Aug-00
Apr-01
Dec-01
Aug-02
Apr-03
Dec-03
Aug-04
Apr-05
Dec-05
Aug-06
Apr-07
Dec-07
Aug-08
Apr-09
Dec-09
Aug-10
Apr-11
Dec-11
Aug-12
Apr-13
Dec-13
Aug-14
Apr-15
Dec-15
Aug-16

PSF International price

POY International price

Cotton (CT1)

Petrochemicals EBIT (INR bn)

Polymer margins (USD/MT)

(USD/MT)

Q2FY17

Q4FY16

Q2FY16

Q4FY15

Q2FY15

12.0

Q4FY14

280

Q2FY14

16.0

Q4FY13

560

Q2FY13

20.0

Q4FY12

840

Q2FY12

24.0

Q4FY11

1,120

Q2FY11

28.0

Q4FY10

(INR bn)

Chart 11: Cracker margins improved 8% QoQ, while polymer margins dipped 14%
32.0
1,400

Polyester margins (USD/MT)

Cracker margins (USD/MT)

Chart 12: Volumes improved sequentially post Dahej shutdown in Q1FY17

2,000

(MT)

1,600
1,200
800

400

Polyester (PSF,PFY,PET)
Polymer (PP,PE,PVC)

Q2FY17

Q4FY16

Q2FY16

Q4FY15

Q2FY15

Q4FY14

Q2FY14

Q4FY13

Q2FY13

Q4FY12

Q2FY12

Q4FY11

Q2FY11

Q4FY10

Intermediates (PX,PTA,MEG)
Source: Company, Edelweiss research

Edelweiss Securities Limited

Reliance Industries

Q416

RIL's total oil production - RHS

60.00

Oil production

Q2FY17

Q4FY16

0.00
Q2FY16

0.0
Q4FY15

12.00

Q2FY15

6.0

Q4FY14

24.00

Q2FY14

12.0

Q4FY13

36.00

Q2FY13

18.0

Q4FY12

48.00

Q2FY12

24.0

Q4FY11

(Kbopd)

Chart 14: KG-D6 oil and gas production dipped 9%/11% sequentially
30.0

(mmscmd)

RIL's total gas production

(kbpd)

0.0
Q217

0.0
Q216

6.0

Q415

15.0

Q215

12.0

Q414

30.0

Q214

18.0

Q413

45.0

Q213

24.0

Q412

60.0

Q212

30.0

Q411

75.0

Q211

(mmscmd)

Chart 13: Total oil and gas production extended its downward trajectory

Gas production (RHS)

6.0

27.0

4.5

18.0

3.0

9.0

1.5

0.0

0.0

(mmscmd)

36.0

Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17

(kbopd)

Chart 15: Panna Mukhta oil and gas production dipped 9%/11% sequentially
45.0
7.5

Oil production

Gas production (RHS)

Source: Company, Edelweiss research

Edelweiss Securities Limited

Oil, Gas and Services

Shale gas: Challenging times persist
The segment recorded EBITDA of ~USD23mn, down 43% sequentially. Henry Hub recovered
to USD2.85/mmbtu from USD1.95/mmbtu in Q1FY17. WTI prices remained volatile, but
averaged flat at USD45/bbl.
Average gross production was at 1,006Mcfe/d (1,095Mcfe/d in Q1FY17). Net sales volume
(RILs share) stood at 8% lower sequentially at 35.9Bcfe. Unit realisation improved to
USD2.6/Mcfe, up 3% QoQ.
Eagle Ford and Marcellus remain the most competitive shale plays in the US, and RIL and its
joint venture (JV) partners are competitively positioned to leverage the price recovery.

Table 4: Shale gas business continued to face headwinds

Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17
193
221
266
270
244
206
138
141
117
110
82
93
89
127
174
199
201
202
174
91
86
63
58
28
40
23
11.2
13.2
13.6
15.1
15.3
16.0
15.2
15.3
15.9
16.9
15.7
13.8
12.7
6.5
6.9
7.0
7.4
7.7
7.9
8.1
8.4
8.6
8.7
8.9
8.9
8.9
8.1
10.4
11.5
11.2
10.7
8.9
4.6
4.2
3.0
2.7
1.3
1.8
1.0
5.4
5.3
6.2
5.6
5.0
4.0
2.9
2.9
2.3
2.1
1.6
2.1
2.2
65.6
78.4
74.7
74.4
82.8
84.5
65.9
61.0
53.8
52.7
34.1
43.0
25.8

Retail: Growth momentum continues

Reliance Retails turnover/EBITDA improved 21%/10% sequentially. The segment continued
its rapid store additions opening 59 stores. It now operates ~3,442 stores across 679 cities.

In addition to increasing its reach, digital has improved its services by offering product
delivery and installation services within 24 hours in 40 cities.

Reliance Retails distribution business sold over 3mn LYF smartphones during the
quarter and partnered with over 500,000 retailers across the country for selling devices
and connectivity.

Reliance Retail added 12 Trends stores during the quarter and re-launched top-8 stores
in the new store concept.

Number of stores

Q2FY17

Q1FY17

Q4FY16

Q3FY16

Q2FY16

Q1FY16

Q4FY15

12.0

Q3FY15

Q2FY15

15.8

Q1FY15

800

Q4FY14

19.6

Q3FY14

1,600

Q2FY14

23.4

Q1FY14

2,400

Q4FY13

27.2

Q3FY13

3,200

(INR mn)

Chart 16: Store additions continued at rapid pace, revenue per store improved QoQ
4,000
31.0

(Nos.)

Revenue (USD mn)

EBITDA (USD mn)
Production (mmscmd)
Cumulative Capex (USD bn)
EBITDA/Cum Capex (% )
Blended realisation ($/mmbtu)
EBITDA margin (%)

Revenue per store (RHS)

Source: Company, Edelweiss research

10

Edelweiss Securities Limited

Reliance Industries
Table 5: Retail business continued to impress
Q3FY14
39,270
1,060
38.3
2.7

Q4FY14
36,390
920
19.3
2.5

Q1FY15
39,990
1,710
15.1
4.3

Q2FY15
41,670
1,860
20.6
4.5

Q3FY15
46,860
2,270
19.3
4.8

Q4FY15
47,880
2,000
31.6
4.2

Q1FY16
46,980
1,980
17.5
4.2

Q2FY16
50,910
2,100
22.2
4.1

Q3FY16
60,420
2,430
28.9
4.0

Q4FY16
56,460
2,210
17.9
3.9

Q1FY17
66,660
2,400
41.9
3.6

Q2FY17
80,790
2,640
58.7
3.3

Source: Company, Edelweiss research

Chart 17: EBIT across businesses

120.0
92.0
64.0
36.0

8.0

Petrochemical

Refining

Oil and Gas

Q2FY17

Q4FY16

Q2FY16

Q4FY15

Q2FY15

Q4FY14

Q2FY14

Q4FY13

Q2FY13

Q4FY12

Q2FY12

Q4FY11

(20.0)
Q2FY11

Q2FY14
34,560
950
30.9
2.7

Q4FY10

Q1FY14
34,740
700
53.1
2.0

(INR bn)

Revenue (INR mn)

EBITDA (INR mn)
Revenue growth (%)
EBITDA margins (%)

PAT

Source: Company, Edelweiss research

11

Edelweiss Securities Limited

Oil, Gas and Services

Table 6: SoTP valuation
Base value
(USD bn)
Refining (@ EV/EBITDA = 5.8x)
28.4
Petchem (@ EV/EBITDA = 5.8x)
21.4
(a) PMT (DCF)
0.6
(b) KG-D6 (DCF)
0.0
(c) NEC-25 (DCF)
0.1
(d) CBM (DCF)
0.8
(e) Value of MJ-1
0.3
India Upstream
1.8
Shale Gas (~50% discount to RIL's investments)
2.7
Retail (@ 2.2x IC)
3.2
Telecom (@ 80% of Invested Capital)
19.7
Value of operating assets
77.2
Fair value

Base value
(INR bn)
1,846
1,388
37
2
7
52
18
116
177
209
1,280
5,016

Base value
(INR/share)
626
471
13
1
2
18
6
39
60
71
434
1,701

Cons. Cash & Cash Eq.

Investments
WIP debt + equity (@100% of CWIP)
Gross Debt
Net debt

6.5
5.8
14.1
33.1
6.6

424
379
919
2,149
427

144
129
312
729
145

SOTP
Less: Conglomerate discount @ 10%
SOTP
CMP
Return on CMP (%)

70.6

4,589

1,557
156
1,401
1,088
29%

Source: Edelweiss research

12

Edelweiss Securities Limited

Reliance Industries
Table 7: Consolidated segmental performance
Segmental revenues (INR mn)
Petrochemical
Refining
Oil and Gas
Organised retail
Others
Gross turnover
Less: Inter segment transfers
Turnover
Less: Excise duty/ service tax recovered
Net turnover
Segmental EBIT (INR mn)
Petrochemical
Refining
Oil and Gas
Organised retail
Others
Total EBIT
Segmental margins (EBIT margins % of sales)
Petrochemical
Refining
Oil and Gas
Organised retail
Others

Q2FY17
224,220
605,270
13,270
80,790
31,470
955,020
138,510
816,510
54,900
761,610

Q2FY16
212,390
607,680
20,670
50,910
28,660
920,310
169,140
751,170
42,160
709,010

34,170
59,750
(4,910)
1,620
1,310
91,940

25,310
54,610
2,420
1,170
2,280
85,790

15.2
9.9
(37.0)
2.0
4.2

11.9
9.0
11.7
2.3
8.0

% change YoY
5.6
(0.4)
(35.8)
58.7
9.8
3.8
(18.1)
8.7
30.2
7.4

Q1FY17
207,180
565,680
13,400
66,660
24,190
877,110
162,600
714,510
64,610
649,900

35.0
9.4
NM
38.5
(42.5)
7.2
YoY bps change
332.3
88.5
(4,870.9)
(29.3)
(379.3)

28,060
65,930
(3,120)
1,480
1,270
93,620

% change QoQ
8.2
7.0
(1.0)
21.2
30.1
8.9
(14.8)
14.3
(15.0)
17.2

21.8
(9.4)
NM
9.5
3.1
(1.8)
QoQ bps change
13.5
169.6
11.7
(178.3)
(23.3)
(1,371.7)
2.2
(21.5)
5.3
(108.7)
Source: Edelweiss research

13

Edelweiss Securities Limited

Oil, Gas and Services

Financial snapshot
Year to March
Net revenues
Raw material costs
Gross profit
Employee expenses
Other expenses
EBITDA
Depreciation
EBIT
Other income
Interest
Add: Prior period items
Add: Exceptional items
Profit before tax
Provision for taxes
Minority interest
Associate profit share
Reported net profit
Adjusted Profit
Diluted shares (mn)
Adjusted Diluted EPS
Diluted P/E (x)
EV/EBITDA (x)
ROAE (%)
As % of net revenues
Gross profit
EBITDA
Reported net profit
Tax rate

Q2FY17
595,770
411,580
184,190
10,160
68,480
105,550
20,290
85,260
22,800
6,330

Q2FY16
608,170
430,670
177,500
9,400
72,250
95,850
20,850
75,000
16,830
7,230

% change
(2.0)
(4.4)
3.8
8.1
(5.2)
10.1
(2.7)
13.7
35.5
(12.4)

Q1FY17
534,960
348,690
186,270
12,510
65,590
108,170
19,500
88,670
20,330
9,240

% change
11.4
18.0
(1.1)
(18.8)
4.4
(2.4)
4.1
(3.8)
12.1
(31.5)

YTD17
1,130,730
760,270
370,460
22,670
134,070
213,720
39,790
173,930
43,130
15,570

FY17E
3,005,943
1,936,017
1,069,925
134,176
451,517
484,232
160,859
323,373
82,454
48,148

(INR mn)
FY18E
3,386,668
2,065,655
1,321,013
262,265
486,802
571,946
218,425
353,522
92,814
67,103

101,730
24,690

84,600
19,260

20.2
28.2

99,760
24,280

2.0
1.7

201,490
48,970

357,679
80,371

379,233
78,960

77,040
77,040
3,236
23.8
-

65,340
65,340
3,236
20.2
-

17.9
17.9

75,480
75,480
3,236
23.3
-

2.1
2.1

152,520
152,520
6,472
47.1
-

276,282
276,282
2,948
93.7
11.6
10.3
10.7

299,135
299,135
2,948
101.5
10.7
8.5
10.7

30.9
17.7
12.9
24.3

29.2
15.8
10.7
22.8

65.7
37.9
27.0
48.6

35.6
16.1
9.2
22.5

39.0
16.9
8.8
20.8

14

17.9

34.8
20.2
14.1
24.3

2.1

Edelweiss Securities Limited

Reliance Industries
Company Description
RIL is the largest private player in the refining, petrochemical and E&P sectors in India. While
RILs refining complex in Jamnagar is the largest in the world and among the most complex,
it is also among the largest integrated petrochemical producers globally. Apart from E&P in
India, RIL has made significant investments in US shale gas. In terms of EBIT, Refining
contribute 60% and Petrochemicals 30%. RIL is also expanding its presence in the areas of
consumer retailing and telecom. EBIT contribution from retail is 2% while telecom
operations has been commercially launched in September 2016, which we believe will have
3 years of start-up losses at EBITDA level. RIL has a weight of 9.1% in BSE Sensex and 7.5% in
S&P CNX Nifty.

Investment Theme
RILs strength lies in its ability to build businesses of global scale and execute complex, timecritical, and capital-intensive projects which will prove advantageous as it embarks on large
investments in all core segments.
We expect non-regulated segments (refining, chemicals and shale) to contribute ~90% of
incremental EBITDA over the next few years.
We are positive on both refining and chemicals. We believe refining margins in Asia will rise
due to a paradigm shift in regional refining dynamics from West to East, which will favor a
complex refiner like Reliance. Global utilization rates have bottomed out in chemicals.
RIL is currently in a capex phase, investing in world-scale projects like petcoke gasification,
off-gas crackers and telecoms, which are expected to drive future growth.

Key Risks
Slow down in global demand or larger than expected capacity additions could impact RILs
refining and chemical margins.
Delay in the commissioning of key upcoming core projects: petcoke gasification and off-gas
cracker, could significantly impact our earnings model.
Delays in government approvals for India E&P or weak domestic gas prices could hamper
progress in upstream.
Weak US natural gas prices could lower the profitability of shale gas assets, though it could
be offset by the liquids-rich acreages which are currently highly profitable.
Rupee appreciation may impact negatively as RIL is positively leveraged to the depreciating
currency.
About two-fifths of RILs capex is in unrelated diversifications, especially telecoms & related.
We believe that the telecom business shall have a long ~5 year gestation, before it becomes
profitable.

15

Edelweiss Securities Limited

Oil, Gas and Services

Financial Statements
Key Assumptions
Year to March

Income statement
FY15

FY16

FY17E

FY18E

Macro
GDP(Y-o-Y %)
Inflation (Avg)

7.2
5.9

7.4
4.8

7.9
5.0

8.3
5.2

Repo rate (exit rate)

7.5

6.8

6.0

6.0

61.2

65.5

67.5

67.0

Year to March
Net revenue
Materials costs

(INR mn)
FY15

FY16

FY17E

FY18E

3,754,350 2,765,440 3,005,943 3,386,668

2,940,460 1,890,540 1,936,017 2,065,655

Gross profit

813,890

874,900 1,069,925 1,321,013

Operating expenses

440,250

432,330

585,693

749,066

EBITDA

373,640

442,570

484,232

571,946

Sector

Depreciation

115,470

129,160

160,859

218,425

Upstream

EBIT

258,170

313,410

323,373

353,522

Add: Other income

86,310

82,460

82,454

92,814

Less: Interest Expense

33,160

36,080

48,148

67,103

4,230

311,320

364,020

357,679

379,233

USD/INR (Avg)

Brent Crude (USD/bbl)

85.6

47.6

52.0

55.0

Gas price (USD/mmbtu)

4.2

4.2

2.8

3.1

Petchem

Add: Exceptional items

Edel cracking mgn USD/mt

821.8

903.6

908.2

907.1

Profit Before Tax

PP margins (USD/mt)

261.9

346.6

250.0

255.0

Less: Provision for Tax

74,740

82,640

80,371

78,960

PXL margins (USD/mt)

322.6

334.1

400.0

408.0

Less: Minority Interest

740

850

1,026

1,138

PTA margins (USD/mt)

145.2

137.5

150.0

153.0

Associate profit share

1,180

2,110

MEG margins (USD/mt)

49.6

16.8

60.0

61.2

237,020

282,640

276,282

299,135

Reported Profit

Company

Exceptional Items

Refining

Adjusted Profit

Refining thrput (mmt)

68

70

70

70

GRM (USD/bbl)

8.6

10.8

11.2

12.0

Chemicals
Chem prodn (mmt)
Chem EBITDA (USD/mt)

17.4

19.6

23.5

26.3

104.3

106.8

110.0

135.8

Gr. gas prdn-PMT mmscmd

1.1

1.1

1.0

1.0

Gr.gas prdn KGD6(mmscmd)

14.0

12.0

14.0

16.4

0.1

0.2

1.0

1.0

RIL nt gas prdn (mmscmd)

11.0

10.3

12.3

13.7

KG-D6 gas (USD/mmbtu)

4.2

4.2

2.8

3.1

RIL % sh gas prdn mmscmd

18.9

20.4

21.6

23.6

US shale gas(USD/mmbtu)

3.8

2.4

3.2

3.4

7.4

7.0

5.8

5.8

Shale Gas

Financial assumptions
Avg. Interest rate (%)
Capex (INR bn)
Debt (INR bn)
Cash conversion cycle

4,230

278,410

276,282

299,135

2,894

2,948

2,948

2,948

81.9

94.4

93.7

101.5

2,894

2,948

2,948

2,948

81.9

94.4

93.7

101.5

125.9

138.9

148.6

176.0

Dividend per share (DPS)

10.0

10.5

16.3

21.8

Dividend Payout Ratio(%)

14.2

12.8

20.3

25.1

Year to March

FY15

FY16

FY17E

FY18E

Operating expenses
Materials costs

11.7
78.3

15.6
68.4

19.5
64.4

22.1
61.0

Shares o /s (mn)
Adjusted Basic EPS
Diluted shares o/s (mn)

India E&P

Gr. gas prdn CBM(mmscmd)

237,020

634

497

524

192

1,609

1,811

2,149

2,268

(1)

(15)

(19)

(15)

Adjusted Diluted EPS

Adjusted Cash EPS

Common size metrics

Staff costs

1.7

2.8

4.5

7.7

10.1

12.8

15.0

14.4

Depreciation

3.1

4.7

5.4

6.4

Interest Expense

0.9

1.3

1.6

2.0

EBITDA margins

10.0

16.0

16.1

16.9

6.3

10.1

9.2

8.9

S G & A expenses

Net Profit margins

Growth ratios (%)
Year to March

FY15

FY16

FY17E

FY18E

(13.6)
7.4

(26.3)
18.4

8.7
9.4

12.7
18.1

PBT

8.2

16.9

(1.7)

6.0

Adjusted Profit

5.4

17.5

(0.8)

8.3

EPS

5.4

15.3

(0.8)

8.3

Revenues
EBITDA

16

Edelweiss Securities Limited

Reliance Industries
Balance sheet

(INR mn)

As on 31st March

FY15

FY16

FY17E

FY18E

Cash flow metrics

Year to March

FY15

Share capital
Reserves & Surplus

29,600
29,560
29,560
29,560
2,155,390 2,406,950 2,631,149 2,851,681

Operating cash flow

Investing cash flow

Shareholders' funds

2,184,990 2,436,510 2,660,709 2,881,241

Financing cash flow

Minority Interest
Short term borrowings

30,380

32,540

33,566

34,704

400,700

390,680

585,680

675,680

Long term borrowings

1,207,800 1,420,000 1,563,114 1,592,172

Total Borrowings

1,608,500 1,810,680 2,148,794 2,267,852

FY17E

FY18E

345,660 398,150 403,450

(648,980) (383,380) (407,407)

FY16

532,710
(99,578)

84,440

(26,951)

75,718

(22,694)

Net cash Flow

(218,880)

(12,181)

71,761

410,439

Capex

(633,640) (496,620) (523,522) (192,392)

Dividend paid

(35,590)

(55,987)

(74,649)

Long Term Liabilities

106,450

176,180

176,180

176,180

Profitability and efficiency ratios

Def. Tax Liability (net)

129,740

138,210

139,134

140,367

Year to March

FY15

FY16

FY17E

FY18E

ROAE (%)
ROACE (%)

11.3
9.6

11.9
9.8

10.7
8.9

10.7
8.9
80

Sources of funds

4,060,060 4,594,120 5,158,383 5,500,345

Gross Block
Net Block

1,951,560 2,105,720 3,612,022 4,013,799

991,980 1,077,810 2,471,932 2,753,880

67

95

84

819,867

Debtors Days

10

13

CWIP (incl. intangible)

1,664,620 2,499,420 1,351,318 1,101,318

Payable Days

75

116

114

109

Total Fixed Assets

3,229,200 4,249,730 4,632,362 4,675,065

Intangible Assets

572,600

672,500

809,112

Inventory Days

Cash Conversion Cycle

(1)

(15)

(19)

(15)

Non current investments

449,750

546,260

516,350

516,350

Current Ratio

1.4

0.9

1.0

1.3

Cash and Equivalents

635,590

511,250

423,700

659,486

Gross Debt/EBITDA

4.3

4.1

4.4

4.0

Inventories

532,480

469,640

444,762

478,410

Gross Debt/Equity

0.7

0.7

0.8

0.8

53,150

48,970

119,241

130,148

Adjusted Debt/Equity

0.7

0.7

0.8

0.8

111,710

178,340

328,119

354,258

Net Debt/Equity

0.4

0.5

0.6

0.6

32,980

57,950

58,338

58,745

Interest Coverage Ratio

7.8

8.7

6.7

5.3

Current Assets (ex cash)

730,320

754,900

770,499

841,602

Trade payable

594,070

612,520

593,707

635,708

Operating ratios

Other Current Liab

390,730

855,500

590,821

556,451

Year to March

Total Current Liab

984,800 1,468,020 1,184,528 1,192,159

Sundry Debtors
Loans & Advances
Other Current Assets

FY15

FY16

FY17E

FY18E

1.0
2.5

0.6
1.7

0.6
1.2

0.6
1.0

1.8

1.2

1.2

1.2

Year to March

FY15

FY16

FY17E

FY18E

Adj. Diluted EPS (INR)

Y-o-Y growth (%)

81.9
5.4

94.4
15.3

93.7
(0.8)

101.5
8.3

125.9

138.9

148.6

176.0

13.3

11.5

11.6

10.7

Net Curr Assets-ex cash

(254,480) (713,120) (414,029) (350,557)

Total Asset Turnover

Fixed Asset Turnover

Uses of funds

4,060,060 4,594,120 5,158,383 5,500,345

Equity Turnover

BVPS (INR)

755.0

826.5

902.5

977.3
Valuation parameters

Free cash flow

Year to March

(INR mn)
FY15

FY16

FY17E

FY18E

237,020
115,470

282,640
129,160

276,282
160,859

299,135
218,425

25,199

27,889

37,329

53,132

Others

(295,729) (522,499)

(69,685)

(76,471)

P/B (x)

1.4

1.3

1.2

1.1

Less: Changes in WC

(263,700) (480,960)

1,335

(38,490)

EV / Sales (x)

1.1

1.6

1.7

1.4

11.1

10.3

10.3

8.5

0.9

1.0

1.5

2.0

Reported Profit
Add: Depreciation
Interest (Net of Tax)

Adjusted Cash EPS (INR)

Diluted P/E (x)

Operating cash flow

345,660

398,150

403,450

532,710

EV / EBITDA (x)

Less: Capex

633,640

496,620

523,522

192,392

Dividend Yield (%)

(98,470) (120,071)

340,318

Free Cash Flow

(287,980)

Peer comparison valuation

Market cap
(USD mn)

Name
Reliance Industries
Bharat Petroleum Corporation
Hindustan Petroleum Corporation
Indian Oil Corporation

Diluted P/E (X)

FY17E
FY18E

EV / EBITDA (X)
FY17E
FY18E

ROAE (%)
FY17E

FY18E

52,776
14,331

11.6
9.1

10.7
8.2

10.3
6.4

8.5
6.3

10.7
30.8

10.7
29.2

6,745

2.8

2.6

5.1

4.9

27.1

24.5

23,350

4.9

4.2

3.7

3.5

19.7

19.9

Median

7.0

6.2

5.8

5.6

23.4

22.2

AVERAGE

7.1

6.4

6.4

5.8

22.1

21.1

Source: Edelweiss research

17

Edelweiss Securities Limited

Oil, Gas and Services

Additional Data
Directors Data
Mukesh D Ambani
Pawan Kumar Kapil
Nikhil R Meswani
Nita Ambani
Dharam Vir Kapur
Yogendra P Trivedi
Adil Zainulbhai

Chairman and Managing Director

Executive Director
Executive Director
Non Executive Non Independent Director
Independent Director
Independent Director
Independent Director

P M S Prasad
Hital R Meswani
Mansingh L Bhakta
Raghunath A Mashelkar
Dipak C Jain
Ashok Misra
Raminder S. Gujral

Executive Director
Executive Director
Independent Director
Independent Director
Independent Director
Independent Director
Independent Director

Auditors - Chaturvedi & Shah, Deloitte Haskins & Sells LLP, Rajendra & Co
*as per last annual report

Holding - Top 10
Perc. Holding

Perc. Holding

Life Insurance Corp Of India

9.12 Capital Group Companies Inc

2.52

Vanguard Group

1.64 Blackrock

1.49

Gic Private Limited

1.05 Dimensional Fund Advisors Lp

0.86

Prudential Icici Asset Mgmt Co

0.47 Nordea Bank Ab

0.45

Sbi Funds Management

0.41 Hdfc Asset Management Co Ltd

0.41

*in last one year

Bulk Deals
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*in last one year

Insider Trades
Reporting Data

Acquired / Seller

B/S

Qty Traded

No Data Available

*in last one year

18

Edelweiss Securities Limited

RATING & INTERPRETATION

Company

Absolute

Relative

Relative

reco

reco

risk

Bharat Petroleum Corporation

BUY

SO

GAIL (INDIA)

BUY

SO

Gujarat State Petronet

BUY

Indian Oil Corporation

Mahanagar Gas Ltd
Petronet LNG

Company

Absolute

Relative

Relative

reco

reco

Risk

Cairn India

HOLD

SP

Gujarat Gas

BUY

SO

SO

Hindustan Petroleum Corporation

HOLD

SP

BUY

SO

Indraprastha Gas

BUY

SO

BUY

SO

ONGC

BUY

SO

HOLD

SP

Reliance Industries

BUY

SO

ABSOLUTE RATING
Ratings

Expected absolute returns over 12 months

Buy

More than 15%

Hold

Between 15% and - 5%

Reduce

Less than -5%

RELATIVE RETURNS RATING

Ratings

Criteria

Sector Outperformer (SO)

Stock return > 1.25 x Sector return

Sector Performer (SP)

Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU)

Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVE RISK RATING

Ratings

Criteria

Low (L)

Bottom 1/3rd percentile in the sector

Medium (M)

Middle 1/3rd percentile in the sector

High (H)

Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings

Criteria

Overweight (OW)

Sector return > 1.25 x Nifty return

Equalweight (EW)

Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW)

Sector return < 0.75 x Nifty return

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Edelweiss Securities Limited

Oil, Gas and Services

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Manoj Bahety
Deputy Head Research
manoj.bahety@edelweissfin.com

Coverage group(s) of stocks by primary analyst(s): Oil, Gas and Services

Bharat Petroleum Corporation, Cairn India, GAIL (INDIA), Gujarat Gas, Gujarat State Petronet, Hindustan Petroleum Corporation, Indraprastha Gas, Indian
Oil Corporation, Mahanagar Gas Ltd, ONGC, Petronet LNG, Reliance Industries

Recent Research
Date

Company

03-Oct-16
22-Sep-16
20-Sep-16

Title

Oil & Gas

Price (INR)

Recos

Key takeaways; sector update;

Sector Update

Mahanagar Strong franchise, high growth

Gas
utility; Initiating Coverage
Reliance
Industries

Betting big on integrated play

stratagem;
Company Update

603

Buy

1074

Buy

Distribution of Ratings / Market Cap

Rating Interpretation

Edelweiss Research Coverage Universe

Rating Distribution*
* - stocks under review

Buy

Hold

158

59

> 50bn

743
Market Cap (INR)

Reduce
12

229

Between 10bn and 50 bn

< 10bn

156

Rating

Total

62

11

Expected to

Buy

appreciate more than 15% over a 12-month period

Hold

appreciate up to 15% over a 12-month period

Reduce

depreciate more than 5% over a 12-month period

One year price chart

446

1,200
1,120

149

1,040

Dec-14

Nov-14

Oct-14

Jul-14
Jan-16

Sep-14

Jun-14

Dec-15

Aug-14

May-14

Nov-15

880

Apr-14

960

Oct-16

Sep-16

Aug-16

Jul-16

Jun-16

May-16

Apr-16

Mar-16

Feb-16

800
Oct-15

Feb-14

Mar-14

(INR)

297

Jan-14

(INR)

594

Reliance Industries

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Edelweiss Securities Limited

Reliance Industries
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Reliance Industries
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