'Buy' rating for Reliance Industries, A tight leash on operational costs: Kotak

Jan 27 2014, 09:28 IST
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Refining segment shines despite lower margins and crude throughput. Refining segment shines despite lower margins and crude throughput.
SummaryRefining segment shines despite lower margins and crude throughput.

Good going. Reliance Industries

reported Q3FY14 net income at R55.1 bn, 6% ahead of our estimate led by (i) better-than-expected performance of the refining segment and (ii) higher other income.

The recent improvement in refining margins, higher gas price from April 2014 and progress in new core business projects augur well for stock performance. We retain our Buy rating on the RIL stock while revising our SOTP (sum-of-the-parts) based target price to Rs 1,030 (Rs 980 previously) by rolling forward to FY2015 estimates.

Refining segment and other income drive beat of net income: RIL reported net income at Rs 55.1 bn (+0.2% year-on-year and +0.4% quarter-on-quarter), 6% ahead of our estimate of Rs 52.1 bn led by (i) strong financial performance of the refining segment and (ii) higher-than-expected other income at Rs 23.1 bn (+12% q-o-q).

We are surprised by sequentially stable Ebit of the refining segment despite lower crude throughput and refining margins—this implies savings of $0.35/bbl (barrel) on operational costs. Reported Ebitda (earnings before interest, taxes, depreciation and amortisation) declined 9% y-o-y and 3% q-o-q to Rs 76.2 bn, 2% ahead of our expected Rs 74.6 bn. The y-o-y decline in Ebitda despite 13% depreciation in the rupee-dollar exchange rate reflects lower refining margins (-$2/bbl).

Q-o-q decline in petchem Ebit; improvement in E&P segment Ebit: RIL’s petchem segment Ebit declined by 15% q-o-q to Rs 21.2 bn (+10% y-o-y) led by (i) weaker margins for polyester and vinyl chains and (ii) presumably lower sales volumes. Refining segment Ebit declined 13% y-o-y to Rs 31.4 bn (-1% q-o-q) despite a weaker rupee exchange rate, reflecting lower refining margins and lower crude throughput (-0.5 mn tons y-o-y). E&P (exploration and production) segment Ebit increased to Rs 5.4 bn in Q3FY14 from Rs 3.6 bn in Q2FY14 led by higher sales volumes for oil and condensate as reflected in higher revenues (+18% q-o-q).

Financial highlights

Ebitda and net income: RIL’s Q3FY14 Ebitda declined by 9% y-o-y and 2.9% q-o-q to Rs 76.2 bn. The y-o-y decline in Ebitda reflects lower refining margin and lower crude throughput. However, net income remained stable at Rs 55.1 bn versus Rs 55 bn in Q3FY13 and Rs 54.9 bn in Q2FY14, reflecting lower depreciation and higher other income.

Higher other income: Other income increased by 33% y-o-y and 12% q-o-q to Rs 23 bn. However, RIL’s cash and cash equivalents decreased to Rs 887 bn at

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