Over the past five years reliance industries (RIL) has grossly underperformed the broader markets (80% underperformance), empirically it's longest such period. One of the prime reasons for the same has been a weak performance of its E&P segment plagued by falling gas production and bureaucratic issues. This caused a shift in focus of investors from RIL’s core business of refining and petrochemicals to the E&P segment. Over the next three years, we believe, these core businesses will drive a strong 25% CAGR in standalone EBIDTA on the back of commencement of large scale projects ‐ off gas cracker and petcoke gasification. The petcoke gasification project whereby RIL is investing US$4bn is expected to commence operations in FY17. Commencement of this project will allow RIL to replace expensive RLNG with gas produced from petcoke leading to incremental US$2/bbl GRM (management guidance of US$2.5/bbl). Off gas cracker will provide a consistent low cost supply of feedstock to the petrochemical plants where RIL is increasing its capacity. While the global environment has been moderately improving form GRMs and petrochemical spreads, RIL will outperform the benchmarks by a significant margin. The E&P segment, which has gone through its share of trials and tribulations, is likely to see a revival in fortunes with gas price hike, moderate increase in production at KG‐D6, commencement of production at new fields and possible exploration upsides from current exploration activities. Shale gas on the other hand will continue to show robust growth in revenues and profitability as both volumes and gas prices head north. While Telecom business might achieve EBIDTA breakeven in three years considering its asset light model, Retail business will show improved trend in profitability. P/E valuations of 9.8x on FY16E earnings is much below RIL’s historical average and we believe a re‐rating is due given strong earnings growth profile in the coming years. We maintain BUY with a revised 9‐month price target of Rs1,050.
RoCE (%) 12.1 12.0 12.5 13.5 Source: Company, India Infoline Research
Reliance Industries
2
Refining Segment: Sustained outperformance to benchmarks Medium term outlook for GRMs Developed world to see stronger economic growth Oil demand globally is derivative of the economic growth which over the past couple of years has been patchy. The world GDP growth rate has fallen from 5.2% in CY10 to 2.9% in CY13E driven by weakness across the board. While GDP growth for advanced economies has fallen from 5.2% in CY10 to 2.9% in CY13E, emerging and developing economies have seen the growth rate falling from 7.5% in CY10 to 4.5% in CY13E. However, growth rates are expected to revive in both the worlds albeit at a faster pace for the developed economies. During CY13E‐18E, advanced economies are likely to see average growth rate of 2.2%, 80bps higher than in CY12 led by Euro area which will see an average growth rate of 1.1%, 170bps higher CY12. Emerging and developing economies during the same period are likely to see an average growth of 5.2%, higher by just 30bps when compared with CY12 growth rate.
Recovering GDP growth in the developed world
‐1%
0%
1%
2%
3%
4%
5%
World Advanced economies
Euro area Major advanced economies
Other advanced economies
European Union
2011
2012
2013E
2014E
2015E
2016E
2017E
2018E
Source: IMF, India Infoline Research
Emerging GDP growth slowing down
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Emerging market and developing economies
Developing Asia
ASEAN‐5 Latin America and the
Caribbean
Middle East and North Africa
Sub‐Saharan Africa
2011
2012
2013E
2014E
2015E
2016E
2017E
2018E
Source: IMF, India Infoline Research
Oil demand globally is derivative of the economic growth which over the past couple of years has been patchy
However, growth rates are expected to revive in both the worlds albeit at a faster pace for the developed economies
Reliance Industries
3
Oil demand to see 1.2% average growth during CY13E‐18E The same has been reflected in the oil demand estimates by OPEC. Over the past six months OPEC has revised world oil demand estimate for CY13 and CY14 upwards by 0.15mbpd and 0.16mbpd. For the same period, OPEC has revised OECD oil demand estimates for CY13 and CY14 by 0.11mbpd and 0.13mbps respectively. During CY13E‐18E, IEA expects an average oil demand growth of 1.2% with higher growth rates in the initial years. With shale gas from US expected to come into the energy markets by CY15, oil demand growth is expected slow down in later years.
Future growth expectations of world GDP and oil demand
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2013E 2014E 2015E 2016E 2017E 2018E
World GDP growth (LHS) World oil demand growth (RHS)
Source: IEA, IMF, India Infoline Research
Changing face of global refining industry The North American supply revolution and the surge in non‐OPEC demand continue to redraw the global refining map. In the process, the role of the refining industry in the global supply chain is changing as refineries move closer to the wellhead and growing non‐OECD markets and international trade in refined products continues to grow. US emerging as a net exporter In North America, the supply revolution and a downtrend in domestic consumption have helped turn the US, long the world’s top importer of refined products, into one of its largest net exporters. Cheap natural gas and ‘advantaged’ (i.e., discounted from benchmark prices) crude have dramatically increased the competitiveness of US refineries, which also benefit from economies of scale, good logistical links to export terminals (the capacity of which is rising) and state‐of‐the‐art technology. US refiners also have benefitted from fast rising demand and a lack of refining capacity in Latin America, which have provided them with ready export markets for excess gasoline and distillate production. As US output of light products keeps rising, thanks in part to a planned expansion of condensate splitting capacity, US refiners might face increasing international pressure in marketing their surplus, however.
During CY13E‐18E, IEA expects an average oil demand growth of 1.2% with higher growth rates in the initial years
The North American supply revolution and the surge in non‐OPEC demand continue to redraw the global refining map Cheap natural gas and ‘advantaged’ crude have dramatically increased the competitiveness of US refineries As US output of light products keeps rising, US refiners might face increasing international pressure in marketing their surplus
Reliance Industries
4
Global capacity adds to outpace demand Non‐OECD economies already account for a clear majority of global crude distillation capacity, but their share of the refining market is set to rise steeply in the next five years following large increments in the Middle East, Asia, Russia and Latin America. China, in particular, may become saddled with significant excess product output, following ambitious expansion plans at both state‐owned refineries and so called ‘tea‐pot’ plants, a sector increasingly restructured and made more efficient in recent years. Saudi Arabia is also aggressively expanding downstream through large‐scale joint ventures with international companies. As global refining capacity expansions outpace upstream supply growth, let alone demand growth, margins and utilisation rates will come under pressure and higher‐cost refineries will face increasingly strong competitive headwinds. European refineries are at particularly high risk of closure over the forecast period. The rise in North American LTO production, coupled with cheap US shale gas, will greatly contribute to these pressures, as it will both make US export refineries more competitive and steeply increase excess light‐product supply (gasoline and naphtha), causing US and European refineries to compete directly for export market outlets.
Closures in Europe to lend some support European refinery closures would likely carry significant implications for both energy security and prices. They would likely make Europe more dependent on product imports, lengthen European supply routes, increase their vulnerability to disruptions and raise European reliance on import terminals and product storage facilities, notably for jet fuel and gasoil. In so doing, they may also result in higher price spreads between European markets and exporters, so as to pay for long‐haul transport costs, while price differentials or time spreads between low‐ and high‐demand periods may widen to cover storage costs. Increased European reliance on trading houses and third‐party suppliers may also leave a growing share of European supply in the hands of market participants with a different set of incentives than those of refiners. Whereas refiners have a clear interest in maximising production and plant utilisation, traders have a different mix of fixed assets and their strategy and market behaviour thus tend to respond to other signals, such as arbitrage opportunities or market volatility.
Share of Non‐OECD economies in the refining market is set to rise steeply in
the next five years following large
increments in the Middle East, Asia, Russia and Latin America
As global refining capacity expansions outpace upstream supply growth, let
alone demand growth, margins and
utilisation rates will come under pressure
Global refining capacity addition trend Regional breakup of refining capacity addition
China, 45%
Other Asia, 14%
Latin America, 14%
Middle East, 22%
Other , 5%
Source: OPEC, India Infoline Research Source: OPEC, India Infoline Research
Reliance Industries
5
RIL GRMs to outperform benchmarks Petcoke gasification to add US$2/bbl to GRMs RIL currently uses imported LNG to run its captive power plant for the refineries. The cost of LNG currently is about US$14‐15/mmbtu. The company is now implementing a petcoke gasification project at the cost of US$4bn. This project is to convert coal and coke, the lowest‐cost fossil fuels, into gas. The project is estimated to commence operations from FY17. The project on commencement will add ~US$2/bbl to RIL GRMs. Cost savings from petcoke gasification project Particulars Unit Value
LNG used mmscmd 10.0
LNG used bn cu meters 3.7
LNG used mmbtu 130.3
LNG Price US$/mmbtu 15.0
Cost of LNG US$mn 1,955
Current pectoke production mn tons 6.5
Price US$/ton 125.0
Revenue forgone US$mn 813
Conversion cost US$/bbl 0.8
Conversion cost US$mn 352
Net savings US$mn 790
Net savings US$/bbl 1.8
Net savings Rs mn 47,414
Refining EBIDTA FY14E Rs mn 172,220
Savings as % of EBIDTA % 27.5%
Source: Company, India Infoline Research
Premium over benchmark GRMs to expand While benchmark GRMs is expected to remain flattish, we expect RIL’s premium to Singapore GRMs to expand as the company would leverage on the following key advantages: Large scale and highly complex refinery
World class logistics infrastructure
Strategic location
Efficient crude sourcing
Global reach with product storages at key destinations
Operational excellence
Refinery Utilization rates consistently surpassing the global averages
Operating costs per barrel amongst the lowest in the world
Flexibility to alter the product slate / adapt to the changing market
dynamics
Commencement of the petcoke gasification project
Petcoke gasification project on commencement will add ~US$2/bbl to RIL GRMs
Reliance Industries
6
Petchem – new projects to enhance performance Over the past three years, petrochemical spreads have come under pressure owing to emergence of low cost gas based players in the Middle East (available of cheap gas) and the US (rising production of shale gas). RIL too has seen those pressures which are reflected in the EBIT margins of the segment falling from a high of 15.2% achieved in Q3 FY11 to 8.4% in Q3 FY14. Economic slowdown in domestic market leading to fall in demand growth has accentuated the woes. While growth in demand is expected to revive with economic recovery expected from H2 FY15, RIL is doing its bit to improve its own performance. Setting up an off‐gas cracker RIL is currently investing US$4bn to set up a cracker and derivative complex. The cracker, based on technology from Technip, would initially produce 1.40‐1.45m tonnes/year of ethylene but will have a designed capacity of 1.6m tonnes/year, making it one of the largest in the world. The capacity includes the ethylene generated by cracking refinery off‐gas, which contain around 1.1m tonnes/year of ethane, and also recovery of 400,000tonnes/year of ethylene from the off‐gas. The ethylene would feed a 750,000tonne/year monoethylene glycol (MEG) plant, a 550,000tonne/year linear low density polyethylene/high density polyethylene (LLDPE/HDPE) swing unit and a 400,000 tonne/year low density polyethylene plant. The fast‐growing Indian market is expected to absorb most of the PE volumes. MEG will be needed to feed Reliance’s polyester expansions but it will still have nearly 350,000tonnes/year of product available for sale. The cracker will also produce 150,000‐160,000tonnes/year of propylene, part of which will be utilised to produce polypropylene (PP) co‐polymer at the existing PP plants. It will not be an extra line but they will be adding a little to the PP capacity. Reliance is pushing hard to complete these projects in 36 months. Technologies for the gasification plant and cracker have been selected and contracts awarded. RIL capacity expansion plan
MTA RIL Curr Capacity
Expansion Total
capacity Expected Indian Demand in FY17
Ethylene 1.9 1.4 3.3 6.7
Propylene 3.0 0.2 3.2 5.1
LDPE 0.2 0.4 0.6 0.7
HDPE/LLDPE 0.9 0.6 1.5 4.6
PP 2.8 0.1 2.9 4.9 Source: Company
Global capacity additions slowing down Globally following a spurt of capacity additions in the past few years, there has been a marked slowdown in capacity additions. With demand slowing down in the developed world along with weakness in emerging economies, utilization levels have dropped considerably. This has resulted in many announced projects either getting shelved or delayed. Product spreads are expected to rise as utilization rates improve in the near future.
While growth in demand is expected to revive with economic recovery expected from H2 FY15, RIL is doing its bit to improve its own performance
RIL is currently investing US$4bn to set up an off‐gas cracker with a capacity if 1.6mn tons
Many announced projects have either
getting shelved or delayed due to
demand slowdown and weak margins
Reliance Industries
7
Addition to global ethylene capacity as in 2013 Addition to global ethylene capacity as in Q4 2013
6.3
7.3
5.8
6.0
6.2
6.4
6.6
6.8
7.0
7.2
7.4
2013F 2014F
mn tons
4.2
4.9
3.8
4.0
4.2
4.4
4.6
4.8
5.0
2013F 2014F
mn tons
Source: Company, India Infoline Research Source: Company, India Infoline Research
Trend in petrochemical prices
60
70
80
90
100
110
120
Q4 FY10
Q2 FY11
Q4 FY11
Q2 FY12
Q4 FY12
Q2 FY13
Q4 FY13
Q2 FY14
Q4 FY14
PE PP
Rs/kg
405060708090
100110120
Q4 FY10
Q2 FY11
Q4 FY11
Q2 FY12
Q4 FY12
Q2 FY13
Q4 FY13
Q2 FY14
Q4 FY14
POY PSF
Rs/kg
30354045505560657075
Q4 FY10
Q2 FY11
Q4 FY11
Q2 FY12
Q4 FY12
Q2 FY13
Q4 FY13
Q2 FY14
Q4 FY14
PTA MEG
Rs/kg
Source: Company
Trend in petrochemical deltas
300
350
400
450
500
550
600
650
Q3 FY10
Q1 FY11
Q3 FY11
Q1 FY12
Q3 FY12
Q1 FY13
Q3 FY13
Q1 FY14
Q3 FY14
HDPE‐NaphthaUS$/ton
0
50
100
150
200
250
Q3 FY10
Q1 FY11
Q3 FY11
Q1 FY12
Q3 FY12
Q1 FY13
Q3 FY13
Q1 FY14
Q3 FY14
PP‐PropyleneUS$/ton
350
400
450
500
550
600
650
Q3 FY10
Q1 FY11
Q3 FY11
Q1 FY12
Q3 FY12
Q1 FY13
Q3 FY13
Q1 FY14
Q3 FY14
PVC‐EDCUS$/ton
100
200
300
400
500
600
Q3 FY10
Q1 FY11
Q3 FY11
Q1 FY12
Q3 FY12
Q1 FY13
Q3 FY13
Q1 FY14
Q3 FY14
POY‐PTA‐MEGUS$/ton
0
100
200
300
400
500
Q3 FY10
Q1 FY11
Q3 FY11
Q1 FY12
Q3 FY12
Q1 FY13
Q3 FY13
Q1 FY14
Q3 FY14
PSF‐PTA‐MEGUS$/ton
50
100
150
200
250
300
Q3 FY10
Q1 FY11
Q3 FY11
Q1 FY12
Q3 FY12
Q1 FY13
Q3 FY13
Q1 FY14
Q3 FY14
PET‐PTA‐MEGUS$/ton
Source: Company
Reliance Industries
8
E&P – Improving outlook
RIL's E&P segment has hogged the limelight over the past many months. The key issues have been 1) constant production declines at KG‐D6, 2) approval of gas price hike by CCEA, 3) conditions for approving gas price hike for RIL, 3) approval of budgets, 4) partners in KG‐D6 block indicating possibilities of reserve upgrades in KG‐D6. While news such as conditional gas price hike (RIL to provide bank guarantee) and possibilities of reserve upgrade are positive for future value accretion, issues regarding appointment of arbitrator for allowance of past capex had their negative impact on the stock performance.
We would like to highlight the following facts: 1) E&P segment contributed only 1.3% of revenues in 9m FY14 and only 7.2%
of the standalone EBIT. Even in the next couple of years the contribution is expected to remain at 2‐2.5% for revenues and 10‐14% for EBIT. This indicates low materiality of E&P segment to near term earnings for RIL.
2) Arbitration and gas price hike issues are only with regards to the KG‐D6 block. RIL is slated to commence production from other key assets like NEC‐25 and CBM blocks over the next couple of years.
Benefits of gas price hike For every US$1/mmbtu increase in gas prices and production rate of 15 mmscmd our EPS estimate for FY15 increases by 1.5%. For our estimates we have assumed gas price of U$$8/mmbtu in FY15 and FY16. This translates into an EPS jump of 7%. While this would result in revenue and earnings growth, cash flows will not rise as incremental revenues will have to be parked as bank guarantee.
While news such as conditional gas price hike and possibilities of reserve upgrade are positive for future value accretion, issues regarding appointment of arbitrator for allowance of past capex had their negative impact on the stock performance
Low contribution of E&P segment to revenues and profitability New blocks to commence production over the medium term For every US$1/mmbtu increase in gas prices and production rate of 15 mmscmd our EPS estimate for FY15 increases by 1.5%
Steady decline in KG‐D6 production Revenue & EBIT contribution very low
Source: Company, India Infoline Research Source: Company, India Infoline Research
Reliance Industries
9
Reserve upgrade by partners BP and Niko Resources the partners of RIL in the KG‐D6 block have rated MJ‐1 discovery as high potential discovery. BP, in its Annual Report for CY13, declared the discovery as one of seven potentially commercial discoveries in its global portfolio. In its AGM presentation in September 2013, Niko Resources highlighted the discovery as a high potential one. It also cited that pre‐drill estimate for gross prospective resources in high case would be 2,562bcf for gas and 176mn barrels for liquids. Following the completion of appraisal process, we expect substantial addition to RIL’s recoverable reserves by the end of current fiscal. It has also been highlighted that the existing infrastructure at KG‐D6 block can be utilized for MJ‐1 discovery resulting in lower lead time for the field to commence production. In spite of the fact that there exist positive triggers for RIL'S E&P business, we are conservative in our assumptions for the segment and value it at Rs130/share in our SOTP valuation. Shale gas business gaining momentum RIL has seen a marked uptrend in its shale gas business with production volumes doubling over the past seven quarters. Over the three assets, a total of 4,000‐5,000 wells are expected to be drilled. This will result in sustained increase in gas production. While gas prices in US have started rising off late, they continue to reel under the historical averages. Nevertheless, price of liquids which now form close to 40% of the total production are quite remunerative. Until the end of Q3 FY14, RIL had invested close to US$6.8bn and has plans to invest an additional US$4bn by FY16. Majority of the investments would be towards drilling of more wells across assets leading to increase in production. We expect a production CAGR of 39% during FY14‐17E. While near term prices for gas might remain in a narrow range, over the longer term, once exports commence from US, we expect gas prices to head north towards the global LNG prices. In terms of cash flow, Pioneer JV has been cash positive, we expect the shale business at consolidated level to be cash positive by FY18.
BP and Niko Resources the partners of RIL in the KG‐D6 block have rated MJ‐1 discovery as high potential discovery Following the completion of appraisal process, we expect substantial addition to RIL’s recoverable reserves by the end of current fiscal Over the three assets, a total of 4,000‐5,000 wells are expected to be drilled While near term prices for gas might remain in a narrow range, over the longer term, once exports commence from US, we expect gas prices to head north towards the global LNG prices
Steady increase in production from the shale fields Through continuous investments in new wells
0
5
10
15
20
25
30
35
40
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Liquid Condensate Gas
bcfe
0
100
200
300
400
500
600
700
800
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Nof wells drilled Producing wells
Nos
Source: Company, India Infoline Research Source: Company, India Infoline Research
Reliance Industries
10
Pioneer JV 2014 development focus remains on drilling in liquid rich areas. Active program of completion optimization and down spacing trials
ongoing in Pioneer for high grading development. Cairzzo JV NEPA development activities maturing. JV to be Free Cash flow positive in
2014. Down‐spacing and Upper Marcellus locations drilling trials being pursued.
Expected to add material drilling location. Cheveron JV Focus on improving costs structure and efficiency
Lower gas prices restricted topline growth EBIDTA Margin have remained in the range of 70‐80%
0
20
40
60
80
100
120
140
160
180
200
0
50
100
150
200
250
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Revenue EBIDTA
US$ mn
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Source: Company, India Infoline Research Source: Company, India Infoline Research
Reliance Industries
11
Telecom and Retail – long term value potential One of the key concerns on the street with regards to RIL has been its rising investments in the non‐related sectors such as telecom and retail. Both of these investments have a long gestation period and possess a lot of regulatory overhangs. However, we believe RIL’s well entrenched presence in retail and its asset light model in the telecom business will put it good stead vis‐à‐vis its competitors. Both these segments will add value to RIL albeit over a longer horizon. Telecom – Asset light strategy In the recently concluded spectrum auction round, RIL bids were not too aggressive and the company acquired contiguous spectrum in 14 circles out of 15 circles with contiguous spectrum. The company will have to spend Rs110bn (33% upfront and remaining in 10 equal annual installments with two year moratorium) for the same. These investments are in addition to the Rs128bn paid to get pan‐India Broadband Wireless Access (BWA) spectrum in FY11. Since then the company has followed an asset light strategy by entering into tower sharing agreements with Reliance Communications and Bharti Infratel. As per the agreement with Reliance Communications RIL will have access to 45,000 towers for a payout of Rs120bn over the lifetime. Also via a separate agreement RIL has access to optic fibre network of Reliance Communications. These agreements will have three pronged benefits 1) faster commencement of operations as compared to setting up all facilities organically, 2) market share gains at a faster clip and 3) reduced costs. While we expect the company to breakeven at the EBIDTA level by FY17E, profits at PAT level should arise only beyond FY20. For RIL’s telecom venture to succeed data services will play a key role. The key risks to this business include 1) limited global success of the technology RIL is using, 2) penetration of devices using broadband network is at meager levels and for that to rise prices of devices have to fall sharply, 3) data penetration in rural areas is still very low. Spectrum acquired by RIL
MHz Rsm/MHz Rs mn
Andhra Pradesh 5.8 1,630 9,454
Assam 5.4 361 1,949
Delhi 5.4 3,640 19,656
Gujarat 6.0 2,378 14,268
Karnataka 5.0 1,550 7,750
Kerala 5.0 520 2,600
Kolkata 5.0 730 3,650
Mahya Pradesh 6.4 504 3,226
Maharashtra 5.0 2,904 14,518
Mumbai 6.6 2,720 17,952
North East 6.4 70 448
Orissa 5.0 160 800
Tamil Nadu 6.2 2,080 12,896
West Bengal 5.6 246 1,378
Total 78.8 1,403 110,544 Source: DoT, India Infoline Research
We believe RIL’s well entrenched presence in retail and its asset light model in the telecom business will put it good stead vis‐à‐vis its competitors. Both these segments will add value to RIL albeit over a longer horizon
the company has followed an asset light strategy by entering into tower sharing agreements with Reliance Communications and Bharti Infratel Via a separate agreement RIL has access to optic fibre network of Reliance Communications
Reliance Industries
12
Retail – steady growth to continue In the past three years, organized retail players have seen their profitability erode on the back of 1) rising rentals, 2) high power costs, 3) levy of service tax and above all 4) a poor consumer sentiment. Amidst these headwinds, RIL has seen its retail business report a strong performance. RIL, now a pan India player has a presence in 141 cities with 1,577 stores covering over 10.7mn square feet (as per Q3 FY14 presentation). It has seen robust traction in revenues over the past many quarters. In terms of profitability, the company turned around at the end of FY13 at the EBIDTA level. Reliance Retail’s pan‐India presence
Source: Company
RIL, now a pan India player has a presence in 141 cities with 1,577 stores covering over 10.7mn square feet
Strong performance across categories Like for Like sales growth across categories
Source: Company, India Infoline Research Source: Company, India Infoline Research
Reliance Industries
13
Revenue growth to remain strong We expect penetration of organized retail to continue to increase as the presence now enters into tier III and tier IV cities. The rural market provides large opportunities as the income growth has been relatively much better there when compared with urban markets on the back of 1) government employment guarantee scheme, 2) increase in MSPs, 3) better than normal monsoons leading to higher agricultural productivity and 4) better credit availability along with interest subvention and loan waiver scheme. Increasing investment in infrastructure has allowed retailers to increase their access to these deep markets. Over the past few years the retail industry has seen a marked improvement in demand for private label goods. The penetration of private labels in India is at mere 6% compared to 19% in US and 39% in UK. The aforementioned factors will continue to drive revenue growth for RIL’s retail arm which has so far invested US$1bn in the venture. The company, since September 2013 has seen gross store addition of one per day. It has seen a much better performance relative to its local competitors owing to its efforts towards setting up an efficient supply chain. Over the longer term the company has an aggressive revenue target which is based on strong growth in the overall market size and increase in market share. Overall retail market has seen robust growth
0%
2%
4%
6%
8%
10%
12%
0
100
200
300
400
500
600
CY98 CY00 CY02 CY04 CY06 CY08 CY10 CY12
Retail market size (LHS) 2 year CAGR (RHS)
US$ bn
Source: IBEF, India Infoline Research
Share of organised retail market at miniscule levels
We expect penetration of organized retail to continue to increase as the presence now enters into tier III and tier IV cities
The penetration of private labels in India is at mere 6% compared to 19% in US and 39% in UK
Over the longer term the company has an aggressive revenue target which is based on strong growth in the overall market size and increase in market share
Reliance Industries
14
Valuations: Trading below historical averages Since January 2009, RIL stock price has risen by 46% as compared to Sensex return of 126%. The gross underperformance was driven by risks to earnings as global economic slowdown impacted refining margins and petrochemical spreads. Furthermore, its E&P segment which was then (2009) expected to see significant growth in earnings contribution saw its profitability dwindle. However, over the next three years standalone earnings will grow meaningfully on the back of 1) slow but steady global economic recovery, 2) commencement of new value creating downstream projects of RIL and 3) recovery in E&P operations. In spite of the expected growth in earnings valuations are substantially below historical average. We maintain our BUY rating with a 9‐month price target of Rs1,050.
Gross underperformance of RIL since January 2009
0
50
100
150
200
250
Jan‐09
Apr‐09
Jul‐09
Oct‐09
Jan‐10
Apr‐10
Jul‐10
Oct‐10
Jan‐11
Apr‐11
Jul‐11
Oct‐11
Jan‐12
Apr‐12
Jul‐12
Oct‐12
Jan‐13
Apr‐13
Jul‐13
Oct‐13
Jan‐14
RIL Sensex
Source: Bloomberg, India Infoline Research
Trades at substantial discount to historical multiples
Du‐Pont Analysis Y/e 31 Mar FY13 FY14E FY15E FY16E
Tax burden (x) 0.80 0.80 0.80 0.80
Interest burden (x) 0.9 0.9 0.9 0.9
EBIT margin (x) 0.1 0.1 0.1 0.1
Asset turnover (x) 1.2 1.2 1.1 1.1
Financial leverage (x) 1.8 1.8 1.7 1.7
RoE (%) 12.1 11.7 12.2 13.2
Recommendation parameters for fundamental reports:
BUY – Absolute return of over +10%
Market Performer – Absolute return between ‐10% to +10%
SELL – Absolute return below ‐10%
Call Failure ‐ In case of a Buy report, if the stock falls 20% below the recommended price on a closing basis, unless otherwise specified by the analyst; or, in case of a Sell report, if the stock rises 20% above the recommended price on a closing basis, unless otherwise specified by the analyst
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