Reliance Industries Rating ‘SELL’: Results in line, downstream margins a concern
RIL’s Q3FY19 Ebitda was in line with our estimate as a surprisingly wide refining margin was offset by lower contribution from petchem and Jio; higher other income boosted net income. Net CapEx remained elevated at ~Rs 293 bn albeit with 14% q-o-q moderation, while net debt and Jio’s fixed assets increased further by ~Rs 140 bn each. Recent weakness in downstream margins may pose a risk to estimates. Sell stays with SoTP-based FV of Rs 1,070.
Standalone Ebitda was 1% ahead of our estimate at `145.1 bn, as a surprisingly robust refining margin was offset by lower petchem contribution and higher other expenses. RIL managed to report a modest $0.7/bbl q-o-q decline in refining margin to $8.8/bbl, despite a $1.8/bbl decline in Singapore complex benchmark, a sharp $30/bbl fall in crude prices and adverse movement in gasoline and fuel oil spreads. Standalone net income was in line with our estimate at `89.3 bn, as higher other income was offset by a rise in finance cost. Consolidated Ebitda was in line with our estimate at `213.2 bn; however, net income was 6% above expectation at `102.5 bn (EPS of `17.3), boosted by a sharp jump in other income. Jio’s revenues and Ebitda increased 12-13% q-o-q to `103.8 bn and `40.5 bn, 1-5% below our estimates, led by a tad slower net addition to the subscriber base (280.1 mn now) and higher operating costs. Retail revenues and Ebitda continued momentum increasing 10-21% q-o-q to `356 bn and `16.8 bn.
Gross CapEx moderated to `273 bn ($3.8 bn), including `70 bn on standalone, `140 bn on Jio and `20 bn on retail; net CapEx was higher at ~`293 bn including forex gain of `20 bn. Effective net debt increased to `2.98 trn ($43 bn) from `2.35 trn ($36 bn) at end-FY18. Jio’s balance sheet increased to ~`3 trn from `2.54 trn at end-FY18. The commissioning of petcoke gasifiers for SEZ refinery has started in phases; however, the timeline for operational commencement of all gasifiers in both DTA and SEZ refineries remains elusive. The management indicated that the proposed demerger of fiber business and slump sale of tower business to related entities may be used to monetize these assets, evidently targeted at reducing debt for Jio in lieu of lease rentals payable to these entities.
We revise RIL’s FY19-21 consolidated EPS to `67 (-1%), `78 (n/c) and `89 (+1%), factoring in (i) revised crude price and exchange rate assumptions, (ii) lower refining margins, (iii) higher petchem volumes, (iv) higher retail contribution and (v) lower Jio contribution. Our SoTP-based fair value remains unchanged at `1,070. We reiterate Sell given our concerns on persisting high capex, non-contributing C-WIP and rising debt levels, all of which preclude a sustainable improvement in return ratios and free cash flows in the medium term. The recent sharp deterioration in refining and petchem margins may compound woes in the near term. We find the stock expensive at 9.6X FY20e Ebitda, 14.5X FY20e EPS and 1.8X March 2020e BVPS, adequately factoring in strong medium-term growth, while ignoring uninspiring return metrics of 8-9% RoCEs, 9-10% CRoCI and 12% RoE.
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