Reliance Industries Ltd - Research Report
Private Client Research
Rating
Buy
Sector
Refineries
Company
Refineries
October 08, 2018
Sensex: 34474.38
CNX Nifty: 10348.05
NSE: RELIANCE
BSE: 500325
Reco Price
Rs. 1030
Price Target (1 Year)
Rs. 1240
Upside
20.39%
Date
October 08, 2018
Sensex
34474.38
CNX Nifty
10348.05
Exchange
Code
NSE
RELIANCE
BSE
500325
Stock Data
CMP (Rs)
1109.40
Face value (Rs)
10
52 Week Range (Rs)
1329.00 - 828.00
Market cap (Rs Crores)
702271.27
Price To Book Value (x)
2.13
P/E Ratio (x)
18.95
EV/EBIDTA (x)
12.63
One Year indexed Stock Performance
Reliance Industries Ltd
Sensex
Return (%)
1m
6m
12m
36m
Absolute
-11.87
20.95
33.37
149.22
Sensex
-9.09
2.03
8.25
28.42
Shareholders
(in %)
30-Jun
Promoter
47.35
Public
52.65
Others
0
Total
100
+91 22 6639 3000
research@stockaxis.com
Profile
Reliance Industries Limited (RIL), a fortune 500 company, is India’s largest private sector entity, with a turnover of 4.31 lakh crores and a profit of 36,000 crores in FY18?.
RIL generates 80% of its revenues and 90% of its profits from its refinery and petrochemicals business, which is the company’s cash cow. RIL uses the cash it generates to build other next-gen businesses and capture large market shares using its brand name.
Over the years, RIL has grown through backward integration in the energy chain (textiles, petrochemicals (petchem), refining, and exploration & production (E&P)). It then moved to new areas including organized retail and telecom - broadband wireless access (BWA). It operates one of the largest refining capacities at a single location and is the largest producer of polyester fibre and yarn. It has also acquired significant scale in organized retailing and telecom.
Segmental Performance
| Sales (Rs. Crore) | Mar-14 | Mar-15 | Mar-16 | Mar-17 | Mar-18 |
|---|---|---|---|---|---|
| Refining | 315,574 | 257,156 | 176,367 | 196,146 | 228,997 |
| Petrochemicals | 101,562 | 94,644 | 81,766 | 86,600 | 114,229 |
| Oil and Gas | 10,888 | 10,934 | 7,518 | 5,191 | 4,966 |
| Organized Retail | 17,121 | 21,011 | 33,452 | 68,729 | |
| Digital Services | 4,685 | ||||
| Others | 54,945 | 17,278 | 18,858 | 17,582 | 9,125 |
| Total | 54,945 | 17,278 | 18,858 | 17,582 | 13,810 |
| EBIT | |||||
| Refining | 13,392 | 15,827 | 23,598 | 25,056 | 25,869 |
| Margin (%) | 4.2% | 6.2% | 13.4% | 12.8% | 11.3% |
| Petrochemicals | 8,403 | 8,291 | 10,221 | 12,990 | 21,179 |
| Margin (%) | 2.7% | 3.2% | 5.8% | 6.6% | 9.2% |
| Oil and Gas | 2,811 | 3,181 | 378 | (1,584) | (1,536) |
| Margin (%) | 0.9% | 1.2% | 0.2% | -0.8% | -0.7% |
| Organized Retail | 417 | 506 | 784 | 2,064 | |
| Margin (%) | 0.0% | 0.2% | 0.3% | 0.4% | 0.9% |
| Digital Services | 3,174 | ||||
| Margin (%) | 0.0% | 0.0% | 0.0% | 0.0% | 1.4% |
| Others | 3,534 | 1,916 | 2,134 | 982 | 1,636 |
| Margin (%) | 1.1% | 0.7% | 1.2% | 0.5% | 0.7% |
| Total | 28,140 | 29,632 | 36,837 | 38,228 | 52,386 |
Refining, Petchem and Telecom business continue to be strong
Investment Rationale:
Gross Refining Margin outperformance to continue in refining business
RIL is the most competitive player in the refinery space due to its efficient state-of-the-art
facilities, broad product portfolio and highly integrated operations. The consistent
high capacity utilizations clocked by both its refineries have resulted in superior
GRMs (USD 11.6/bbl in FY18) over other players and benchmark Singapore GRM (USD
4.4/bbl). We believe RIL will continue to benefit from its efficient refining process,
clocking best GRMs in the industry.
Past capital Investments to drive Petrochemicals segment growth
RIL holds a leadership position in many downstream crude derivatives in the domestic
petrochemicals (petchem) market. Globally, it is the second largest producer of
polyester fibre/yarn and is amongst the top global manufacturers of some downstream
products including polypropylene (PP), paraxylene (PX), mono ethylene glycol (MEG),
purified terephthalic acid (PTA), etc. It has recently commissioned its ethane cracker
project and refinery off-gas cracker (ROGC), which will help produce high value
polymer derivatives from low-cost fossil fuels resulting in lower feedstock costs.
Additionally, the pet-coke gasification will benefit the company due to increasing
crude oil prices.
Telecom to drive growth
Jio has a significant advantage due to its data-ready network with no baggage of
older technologies for voice services. This helps Jio to focus solely on improving
the user experience for its data customers. Jio is the most popular wireless broadband
service in the country with a subscriber base of over 215 million. Going forward,
Jio will bear the fruits of its investments in content, which will help attract
customers and improve the customer stickiness. The launch of wired broadband services
in the near future will also be a major trigger.
Industry
Petrochemicals
The petrochemicals industry contributes about 30% to India's chemical industry,
which is likely to be valued at $250 billion by 2020. In this journey, the petrochemicals
industry itself is expected to reach $100 billion by 2020 growing at a compounded
annual growth rate (CAGR) of about 14%, according to a study by the Associated Chambers
of Commerce and Industry of India (ASSOCHAM).
Telecom
India’s broadband penetration is ~121 million subscribers, which is ~10% of
the total population base of 1.2 billion and 12% of the total mobile subscriber
base of over 1 billion. Globally, there is a major shift to multimedia. A report
by Ericsson Mobility forecasts mobile phone data traffic to grow at 45% CAGR over
calendar years 2015‐2021. With its relatively low penetration, India could grow
faster, as technology becomes available. In addition to fixed and wireless broadband
(voice+data) on an all‐IP network, Reliance Jio, RIL’s BWA service, will offer
solutions in sectors such as education, healthcare, security, communications, financial
services, government‐citizen interfaces and entertainment. RIL aims to integrate
Jio’s capabilities with its other consumer‐facing businesses such as retail
and media.
Retail
The Indian retail industry has emerged as one of the most dynamic and fast-paced
industries due to the entry of several new players. Total consumption expenditure
is expected to reach nearly US$ 3,600 billion by 2020 from US$ 1,824 billion in
2017. It accounts for over 10 per cent of the country’s Gross Domestic Product
(GDP) and around 8 per cent of the employment. India is the world’s fifth-largest
global destination in the retail space.
India’s retail market is expected to increase by 60 per cent to reach US$ 1.1 trillion by 2020, on the back of factors like rising incomes and lifestyle changes by middle class and increased digital connectivity. While the overall retail market is expected to grow at 12 per cent per annum, modern trade would expand twice as fast at 20 per cent per annum and traditional trade at 10 per cent. In FY17, organised retail market contributed 7 per cent of the total sector and unorganised retail market contributed the rest 93 per cent of the sector.
Profit & Loss Statement:- (Consolidated)
(Rs Crores)
| Description | Mar-16 | Mar-17 | Mar-18 | Mar-19E | Mar-20E | Mar-21E |
|---|---|---|---|---|---|---|
| Net Sales | 273999.00 | 305382.00 | 414143.00 | 538386.00 | 565305.00 | 593570.00 |
| Growth (%) | 11.45% | 35.61% | 30.00% | 5.00% | 5.00% | |
| COGS | 200004.00 | 223791.00 | 281940.00 | 362065.00 | 377341.00 | 393240.00 |
| Gross Profit | 73995.00 | 81591.00 | 132203.00 | 176321.00 | 187964.00 | 200330.00 |
| Gross Profit Margin | 27.01% | 26.72% | 31.92% | 32.75% | 33.25% | 33.75% |
| Employee Benefits Expenses | 7407.00 | 8388.00 | 9523.00 | 12114.00 | 12719.00 | 11871.00 |
| % Sales | 2.70% | 2.75% | 2.30% | 2.25% | 2.25% | 2.00% |
| Other Manufacturing Expenses | 7788.00 | 8614.00 | 9042.00 | 10768.00 | 11306.00 | 11871.00 |
| % Sales | 2.84% | 2.82% | 2.18% | 2.00% | 2.00% | 2.00% |
| General & Administration Exp | 9846.00 | 8941.00 | 19294.00 | 24227.00 | 25439.00 | 25227.00 |
| % Sales | 3.59% | 2.93% | 4.66% | 4.50% | 4.50% | 4.25% |
| Selling & Distribution Exp | 9462.00 | 10294.00 | 33000.00 | 43071.00 | 45224.00 | 46002.00 |
| % Sales | 3.45% | 3.37% | 7.97% | 8.00% | 8.00% | 7.75% |
| Miscelleneous Exp | 760.00 | 1121.00 | 982.00 | 1346.00 | 1413.00 | 1484.00 |
| % Sales | 0.28% | 0.37% | 0.24% | 0.25% | 0.25% | 0.25% |
| Total Expenditure | 235267.00 | 261149.00 | 353781.00 | 453590.00 | 473443.00 | 489696.00 |
| Less: Expenses Capitalised | 2507.00 | 1961.00 | 3814.00 | 3000.00 | 3000.00 | 3000.00 |
| EBITDA | 41239.00 | 46194.00 | 64176.00 | 87796.00 | 94862.00 | 106875.00 |
| EBITDA Margin | 15.05% | 15.13% | 15.50% | 16.31% | 16.78% | 18.01% |
| Other Income | 12518.00 | 9443.00 | 9949.00 | 10446.00 | 10969.00 | 11517.00 |
| Depreciation | 11565.00 | 11646.00 | 16706.00 | 20883.00 | 22971.00 | 25268.00 |
| EBIT | 42192.00 | 43991.00 | 57419.00 | 77360.00 | 82860.00 | 93124.00 |
| Interest | 3691.00 | 3849.00 | 8052.00 | 9662.00 | 10629.00 | 11692.00 |
| Profit Before Tax | 38501.00 | 40142.00 | 49367.00 | 67697.00 | 72231.00 | 81433.00 |
| Tax | 8876.00 | 10201.00 | 13346.00 | 18278.00 | 19502.00 | 21987.00 |
| Tax rate | 23.05% | 25.41% | 27.03% | 27.00% | 27.00% | 27.00% |
| Profit After Tax | 29625.00 | 29941.00 | 36021.00 | 49419.00 | 52729.00 | 59446.00 |
| PAT Margin | 10.81% | 9.80% | 8.70% | 9.18% | 9.33% | 10.01% |
| Share of Associates | 236.00 | (108) | 59.00 | - | - | - |
| Minority Interest | (116) | 68.00 | (5) | - | - | - |
| Consolidated Net Profit | 29745.00 | 29901.00 | 36075.00 | 49419.00 | 52729.00 | 59446.00 |
| No of shares | 589.60 | 591.80 | 592.20 | 592.20 | 592.20 | 592.20 |
| EPS | 50.45 | 50.53 | 60.92 | 83.45 | 89.04 | 100.38 |
| CMP | 523.00 | 660.00 | 883.00 | 1030.00 | 1030.00 | 1030.00 |
| Market Cap | 308140.00 | 390351.00 | 522794.00 | 653095.00 | 653095.00 | 653095.00 |
| Debt | 181404.00 | 197338.00 | 219633.00 | 219633.00 | 219633.00 | 219633.00 |
| Cash | 11028.00 | 3023.00 | 4255.00 | 4255.00 | 4255.00 | 4255.00 |
| PE | 10.40 | 13.10 | 14.50 | 12.34 | 11.57 | 10.26 |
| EV/EBITDA | 11.60 | 12.66 | 11.50 | 9.89 | 9.16 | 8.13 |
Source: Stockaxis Research, Company Data
Valuation
At the current market price (CMP) of Rs. 1030, the stock trades at a PE of 11.6x FY20E EPS and an EV/ EBITDA of 9.2 FY20E EBITDA. We recommend buy with a target price of Rs. 1240 valuing the stock at a PE of 11.6x FY20E EPS.