Reliance Industries Ltd (RIL) declared better-than-expected set of numbers on both revenue as well as on the profit front for the third quarter of FY10. Numbers exceeded our estimates primarily on account of the higher-than-expected refining throughout and higher sales of petrochemical products.
Refining margins stood at $5.9 (Rs272) per barrel against our expectation of $5.5 per barrel. Gas production from the KG-basin stood at 46 million standard cu. m per day (mscmd), which was slightly lower than our estimate of 50 mscmd. On account of strong growth in profitability over the next couple of years, improvement in refining margins, positive news flows from the exploration and production segment and potential overseas acquisition, we remain positive on the growth prospects of the company and maintain a buy on the stock.
During the December quarter, RIL reported a revenue increase of 92.3% year-on-year (y-o-y) to Rs56,856 crore primarily on the back of 142.9% y-o-y growth in refining revenues to Rs48,000 crore.
Graphics: Yogesh Kumar / Mint
Earnings before interest, tax, depreciation and amortization (Ebitda) was higher than our estimate by 10.8% on account of strong performance on the volume front. Depreciation during the quarter was higher than our estimate of Rs2,433 crore and stood at Rs2,795 crore.
The refining and marketing segment registered a decent performance during the quarter in spite of the significant softening of refining margins during the quarter. Crude processing stood at 16.6 million tonne, up 110.9% y-o-y, with the special economic zone refinery reporting capacity utilization in excess of 115%.
Crude processing was higher on account of Reliance Petroleum Ltd’s merger with RIL. Increase in crude throughout and higher crude oil prices led to 142.9% y-o-y increase in refining and marketing revenues to Rs48,000 crore. On the margins front, RIL reported slightly higher-than-expected gross refining margins. RIL managed to earn a spread of $4 per barrel;, which was better than the second quarter of FY10.
The petrochemical segment revenues grew 16.9% y-o-y to Rs14,756 crore due to higher crude and product prices y-o-y and increase in volumes on account of expansion of polypropylene capacity. On a y-o-y basis, product deltas improved leading to increase in earnings before interest and tax (Ebit) margins by 80 basis points (bps) y-o-y to 13.9%.
However, on a q-o-q basis, margins softened on the back of rise in feedstock prices, which was higher than the rise in product prices, leading to Ebit margins contracting by 253 bps q-o-q to 13.9%.
Polyester margins were also lower on q-o-q basis following the decline in POY-PTA-MEG delta and PSF-PTA-MEG deltas. However, margins of integrated firms such as RIL were less affected on account of increase in the fibre intermediate margins, which improved due to higher deltas for MEG-naphtha and PTA-PX.
Around 80% of KG D6 gas is sold to power (48%) and fertilizer (31%) sectors. This gas from KG D6 is sold at the empowered group of ministers (eGoM)-approved price of $4.2 per million British thermal unit. During the quarter, eGoM allocated 50 mscmd of gas, of which 20 mscmd was on firm basis and 30 mscmd on fallback basis. This allocation is beyond the 40 mscmd of gas allocated earlier. The company has already executed gas sales and purchase agreements with 48 customers for selling over 61 mscmd of gas.
Gas production currently stands at 60 mscmd and the company has successfully assessed design capacity of production facilities to handle 80 mscmd of gas. Thus, further ramp up in gas production from KG D6 will happen in the fourth quarter of FY10. KG D6 crude oil production during the quarter stood at 10,000 barrels per day (lower than our estimate of 13,500 barrels per day), wherein realizations stood at $75.5 per barrel as against $60.4 per barrel in the second quarter of FY10. RIL also notified two discoveries during the quarter.
Recent sale of treasury shares (garnering Rs9,328 crore) coupled with inorganic growth plans are likely to provide a positive catalyst to the stock price going ahead. This along with low debt-equity ratio of 0.42 is likely to keep the company in high growth orbit going ahead. Given its valuation of 1.8 times estimated FY12 price/book value, we believe the company is relatively undervalued at current levels. We maintain a buy on RIL, with a target price of Rs1,260, providing an upside of 19.6% from current levels.