Reliance Industries: Subdued outlook on core businesses
Reliance Industries reported lower than estimated 3QFY12 EBITDA at Rs72.9b (-24% y-o-y, -26% q-o-q) led by (1) Lower GRM at USD6.8/bbl (est of USD7.7/bbl), (2) Lower petchem EBIT at Rs21.6b (est of Rs22.1b) led by lower margins and (3) lower E&P EBIT at Rs12.9b (v/s est of 14.8b) led by higher than expected depletion. Impact of higher than expected D,D&A at Rs25.7b (v/s est of Rs24.8b) and interest cost at Rs6.9b (v/s est of Rs6.5b) was compensated by higher other income at Rs17.2b (v/s est of Rs13.5b) resulting in PAT at Rs44.4b (-14% y-o-y and -22% q-o-q). Other income contribution to PBT reached 30% in 3QFY12.
-RIL to buyback upto 120m shares (3.7% of outstanding equity and 7% of free float): RIL board has approved share buyback upto 120m shares from open market at price not exceeding Rs870/sh (17% premium to previous day closing of announcement on Jan 18) and aggregate amount not exceeding Rs104.4b.
-Operational Update: RIL's reported GRM at USD6.8/bbl (v/s est of USD7.7/bbl) resulted in a USD1.1/bbl discount to regional benchmark Reuters Singapore GRM of USD7.9/bbl in 3QFY12. Exports help to prevent volume decline in petchem EBIT. KG-D6 production (D1/D3+MA1 fields) was in-line at 41mmscmd (v/s 45.3mmscmd in 2QFY12) and currently is at ~38mmscmd.
-Cutting FY12/FY13 estimates by 6%/8%: Motilal Oswal cut their FY12/FY13 EPS by 6% and 8% to factor in the (1) lower GRM at USD8.6/8.2/bbl (earlier at USD9.2/9.4/bbl), (2) lower KG-D6 gas production at 43/35mmscmd (v/s earlier 43.5/38mmscmd) which is partly compensated by revised RsUSD at 48/50 (v/s earlier 47.7/48).
Valuation and view: In the context of RIL's recent investments in non-core businesses which are yet to provide any clarity on the returns, Motilal Oswal believe that the buyback is the best possible option to deploy surplus cash. They expect the buyback offer will provide the support to near term stock performance in the midst of uncertain/subdued outlook on its core businesses. On FY13E basis, the stock trades at 11.5 times FY13E adj. EPS of Rs69.1 and EV/EBITDA of 7.5 times. They maintain Neutral with a SOTP based target price of Rs841/sh (earlier at Rs896/sh) due to concerns on RoE reaching sub-14%, falling KG-D6 volumes and increased share (75%) of cyclical refining and petchem businesses.
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Motilal Oswal was founded in 1987 as a small sub-broking unit, with just two people running the show. Today it has a 2000 member team with a networth of Rs7 bn and market capitalization as of March 31, 2008 at Rs19 bn.
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