Buy Reliance Industries; target of Rs 1285: KR Choksey

KR Choksey's research report on Reliance Industries

Reliance Industries Ltd (RIL) reported net profit of INR 71940 mn, exceeding market expectation. Net profit increased 1.5% QoQ and declined 22.1% YoY; QoQ rise is mainly on account of stable refining margins and higher production from refining and petchem segment. GRMs stood at USD 10.1/ barrel compared to USD 11.5/ barrel in Q1FY17 and USD 10.6 in Q2FY16. GRMs were lower because of decline in gasoline cracks. On a QoQ basis, gasoline cracks declined 34.3% and disel cracks declined 10.0%. Petchem EBIT increased by 21.8% QoQ and 35.5% YoY, as product deltas held up well despite lower prices along with higher volumes. Retail business has been consolidated and posted an EBIT of INR 1620 mn for the quarter up 9.5% QoQ and 42.1% YoY. Other income was up 0.63%% QoQ and 63.9% YoY to INR 23930 mn. RIL's outstanding debt was higher at INR 1891320 mn as on Sep 30, 2016 as compared to INR 1803880 mn as on Mar 31, 2016. Cash in the books stood at INR 825330 Vs INR 899960 mn in as on Mar 31, 2016. These were in bank deposits, mutual funds, CDs and Government Bonds and other marketable securities. The capital expenditure for the quarter ended Sep 2016 was INR 172100 mn ($ 2.6 billion) including exchange rate difference capitalization. Capital expenditure was principally on account of ongoing expansions projects in the petrochemicals and refining business at Jamnagar, Dahej and Hazira, Jio Infocomm and US Shale gas projects.

We believe over the medium to long term refining margins to remain range bound as capacity additions though it is delayed will eventually match the demand growth. RIL will further gain from efficient crude sourcing and product placement. We expect RIL’s GRMs to be between $10.0-11.5/bbl in FY17 (will go up by $2.5/bbl post commissioning of petcoke regasification terminal). We expect margins to remain stable in petchem segment along with the petchem capacity addition and operational optimization. We also remain very positive on Jio and believe that all the issues related to inter connectivity will be sorted out. We recommend BUY with the target price of INR 1,288/share based on SOTP methodology.