110310 ril everything u wanna know

8/8/2019 110310 RIL Everything u Wanna Know

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Reliance Industries Limited

Everything you wanted to know about RIL

India Energy, Chemicals

Pradeep MirchandaniAC

+91 (22) 6157 3591

[email protected]

J.P. Morgan India (Private) Limited

See the end pages of this presentation for analyst certification and important disclosures, including non-US analyst disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision.

Asia Pacific Equity Research

March 2010

India Energy, Chemicals

Neil Gupte+91 (22) 6157 3592

[email protected]

J.P. Morgan India (Private) Limited


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RIL Indias largest company

!Indias largest company - $70 bn market cap

!12% of NIFTY, MSCI India; 13% of SENSEX

!Daily trading volumes - $190mn

Key business segments

!Refining largest single location refinery complex in the world

!Petrochemicals local dominance, pursuing global opportunities

!E&P Changing earnings mix; driving earnings, valuations

Weightings in benchmark indices

Weightings in benchmark indices

Source: Bloomberg, MSCI

5%

6%

7%

8%

9%10%

11%

12%

13%

14%

SENSEX NIFTY MSCI

Source: Bloomberg


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Genesis

RIL Building blocks

RIL Building blocks

Source: J.P. Morgan estimates. *Gross block includes strategic investment and is indicative in nature, not reflective of exact investments

"Starting with textiles in the 1970s, RIL grew through a series of massive projects in polyester, fiber

intermediates, plastics, petrochemicals, petroleum refining and oil & gas E&P. It is a fully integratedplayer in materials and the energy value chain. The company has ventured into organized retail andinfrastructure development (SEZs) and pursuing inorganic growth opportunities in energy,chemicals.

"In 2005, as part of the family settlement, RIL underwent substantial restructuring. DhirubhaiAmbanis elder son, Mukesh Ambani, retained control of RIL with the core petrochemical, refining

and E&P businesses. The younger son, Anil Ambani, got control of the telecom, power utility andfinancial services businesses

"Key strengths: Excellent project execution; managing the environment


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RIL Ownership

! Promoter (MDA) group holds 40.4% (49.8% incl. treasury shares)

! Treasury shares created due to merger of Reliance Petroleum (first refinery) into RIL in

2000

! 5.7% treasury shares (non-voting) held by 100% subs of RIL created due to

shares in RPL (old) held by subs

! 3.7% treasury shares (voting) held by Petroleum trust shares in RPL (old) held

directly by RIL. RIL has been selling down this stake over the last few months

! 28.4% held by institutional shareholders 16.8% FII, 11.6% domestic. Underowned

compared to benchmarks as stock weighting of >10% is not allowed in many funds

! Reliance Petroleum (new refinery) was merged into RIL in 2009

Shareholding in RILShareholding in RIL

Source: NSE

0%

2%

4%

6%

8%

10%

12%

14%

NIFTY FII DII

RIL Under owned; ownership vs.benchmark

RIL Under owned; ownership vs.benchmark

Source: Bloomberg

Promoters,

40.4

Treasury, 9.4FII, 16.8

Domestic,

11.6

Others, 21.7


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RIL Current business mix

Refining, 70%

Petchem,

25%

E&P, 5%

RIL revenue splitRIL revenue split

Source: Company data

RIL EBIT splitRIL EBIT split


Refining, 29%E&P, 26%

Petchem,

45%


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RIL Refining 29% of FY10 EBIT

!Refining capacity of 62 mmtpa 1.24mbbls/daylargest refinery complex in the world (c.2% of globalcrude processing capacity)

!High complexity (Nelson complexity of 11.3 for oldrefinery, 14 for new one)

! Low capital costs (US$835/complexity bbl)

!Ability to handle tougher crude diet API of 28 forolder refinery, 24 for new one lower input costs

!Secondary processing capacity allows conversion of

heavy crude to light end products

0.02.04.06.08.0

10.012.014.016.0

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

(US$/bbl)

Diff. (US$/bbl) RIL GRMs Singapore GRMs

RIL GRMs and premium over SingaporeRIL GRMs and premium over Singapore

Source: Bloomberg, Company data

!Results in consistently strong margins at premiumto Singapore GRM

!GRMs have rebounded in 4QFY10 Singapore

GRMs averaging $4/bbl up from 6-year low of

$1.13/bbl in 3QFY10

!Light-heavy crude differentials have inched up this

quarter benefits complex refiners like RIL

RIL refinery product slateRIL refinery product slate

Source: J.P. Morgan, Company

RPL refinery product slateRPL refinery product slate

Source: J.P. Morgan, Company

Product % of production

Diesel 43%

Reformate/propylene 12%

Coke+sulphur 10%

Naphtha 9%

Petrol 8%Kerosene/jet fuel 8%

LPG 8%

Product % of production

Diesel 43%

Gasoline 31%

Jet/Kerosene 5%

Petcoke 9%

Alkylates 9%

Propylene 3%

Sulphur 2%


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Refining outlook

! GRMs average $4/bbl in the current quarter up from 4QCY09 lows of $1.13/bbl

! Non-OECD to lead demand pick up

distillates the dominant product expecttightness in this market

! US gasoline demand to remain soft

! We expect GRMs to average $4.5/bbl in 2010

!

Excess supply to balance out by reduced run-rates and refinery shut downs

0

2

4

6

8

10

12

14

16

Nov-03 Feb-05 May-06 Aug-07 Nov-08 Feb-10

US$/bbl

Singapore GRMsSingapore GRMs

Source: Bloomberg

Global refining utilization and Singapore GRMsGlobal refining utilization and Singapore GRMs

Source: Company data, IEA, JODI, J.P. Morgan estimates

Refinery shut downs globallyRefinery shut downs globally

Source: Companies, Bloomberg

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Nov-0

4

Apr-05

Sep-0

5

Feb-0

6

Jul-06

Dec-0

6

May-0

7

Oct-07

Mar-08

Aug-0

8

Jan-0

9

Jun-0

9

Nov-0

9

(US$/bbl)

Light-heavy crude differentialLight-heavy crude differential

Source: Bloomberg

Company kBOPD Place

Valero 275 Aruba

Valero 190 Delaware

Sunoco 145 Eagle Point

Holly 35 Tulsa

Total 80 Normandy

Nippon 60 Toyama

PetroPlus 117 Teesside

Total 160 Dunkirk

Caltex 105 Kurnell

Shell 130 Montreal

Chevron 220 Pembroke

Showa Shell 120 KeihinTotal 1637


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RIL petrochemicals 45% of FY10 EBIT

!Dominates the Indian petrochemlandscape 55-85% of Indian capacities

!Mix of Naphtha and gas crackers

!India market provides growth visibility(12% CAGR over last 4 years) and tariff

protection in a severe downturn

! Lyondell Basell bid aims to build globalscale

!Integrated presence in polymers andpolyester/polyester intermediates

!We expect the petchem cycle to bottom inCY10

Petchem cycle to bottom in CY10Petchem cycle to bottom in CY10POLYOLEFINS Capacity (kmtpa) Global Rank Market Share

LyondellBasell

PE 5,313 3 6.6%LDPE 1,987 1 9.3%

HDPE 2,814 2 8.2%

PP 6,669 1 13.0%

RIL

PE 1,115 n.a. 1.4%

PP 2,600 4 5.1%

COMBINED

PE 6,428 Top 3 8.0%PP 9,269 1 18.1%

RIL and Lyondell Basell capacitiesRIL and Lyondell Basell capacities


Reliance dominates the Indian petrochemical marketReliance dominates the Indian petrochemical market

Source:J. P. Morgan, CMAI

RIL Capacity (MT) % of India capacity Comment

PP 2,600,000 83% 4th largest producer worldwide

PX 1,904,600 85% 4th largest producer worldwide

PE 1,115,000 66%

PTA 2,050,000 68%

PVC 625,000 62%

MEG 733,400 82%

PFY 1,112,725 55%

PSF 741,612 73%

World's largest polyester fibre and

yarn producer


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RIL E &P 26% of EBIT

! Will account for ~44% of EBITDA

from FY11E (incl. RPL)

! Key producing asset KG-D6 block

(east coast off-shore). Production at

60mmscmd capacity of 80mmscmd

currently. We estimate 18TCF

recoverable reserves

!Significant presence in east coast

deepwater exploration acreage

!Total acreage of 425,000 sq.km,mainly in India

KG-D6 production profileKG-D6 production profile


Consolidated EBITDA mixConsolidated EBITDA mix

Source: J.P. Morgan estimates, Company data

Other significant/prospective blocks

!NEC-25, MN-D4 (partner Niko) 11

exploration successes in NEC25;

8.3TCF gas in-place to date, MND4

4.2mn acre block; 1st well in 1HCY10

!KG-D3, D9 (partner Hardy)

Exploration in progress D3 has

9.3TCF prospective reserves

Key downside risk remains pricingdispute with RNRL matter before

Supreme Court

0

100,000

200,000

300,000

400,000

500,000

2007 2008 2009 2010E 2011E 2012E

Refining Petchem E&P


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Key earnings driversRefining

! Key drivers for GRMs are distillates (43% of slate) wehave a positive outlook on distillate spreads

! New refinery (RPL) has a 30% gasoline slate but will benefitfrom tighter product specs

! RPL refinery (SEZ) products (29.4MMTPA) are to beexported dependence on global demand recovery

Petrochemicals

! Polypropylene (PP), Paraxylene (PX), Polyethylene (PE),Polyester Filament Yarns (PFY) are the key products

! PP-Naphtha and PX-Naphtha spreads are key drivers, dueto RILs integrated operations

E & P

! Increasing volumes (KG-D6) will drive E&P earnings

! Pricing is a risk, if RIL is forced to supply to RNRL atUS$2.34/mmbtu, earnings get impacted 13%

! Full cost method tends to understate earnings IFRSadoption in India could lead to higher E&P EBIT

Profit 2011 2012

Base 266,119 274,657

GRM - higher by $2 5.3% 5.1%

Petchem - margins higher 5% 9.2% 9.8%

E&P - price $3.3 -12.8% -16.3%

RIL earnings sensitivityRIL earnings sensitivity

Source: J.P. Morgan estimates


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RIL Integrated through the Hydrocarbon value chain

! Reliance has

aggressively pursued

an integrated business

model to capture value

across the chain

! Disruptions (spikes)/or

squeezes in petchem

segments get

smoothed out as

spread between final

product

(polymer/polyester)

and raw material

(naphtha/reformate)

drive earnings

! Smoother earnings are

positive for cyclical

business valuations


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Whats been impacting stock performance?

400

600

800

1000

1200

1400

Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

Unfavorable BombayHC verdict in RNRL

case

National electionresults

Hardy Oilannounces drywell in D9 block

Treasury sharesale,

LB.uncertaintyon use of cash,

court case verdictnear?

Govt. denies asking NTPC

to accept $4.2/mmbtuprice

RIL starts processingcrude at new refinery

Petchem volumes,margins rise

Poor refiningquarter

Moderate crude, stableGRMs, cyclical

business outlookimproves

GRMs reboundfrom 6-yr lows andpetchem spreads

improvePoor cyclical businessoutlook

Share price drivers

! Refining Margins

! Light-Heavy differentials

! Distillate spread outlook

! OECD demand recovery, refinery shutdowns

! Petchem

! PP spreads! MEG & PX spreads

! Middle East supply overhang

! E&P

! Discoveries/dry wells

! Court case

! Corporate action

! LB bid

! Treasury share sales

D6 productionbegins

RIL vs. India P/ERIL vs. India P/E

Source: Bloomberg, MSCI, IBES, J.P. Morgan, Company data

0

5

10

15

20

25

30

35

Jun-00 Dec-01 Jun-03 Dec-04 Jun-06 Dec-07 Jun-09

MSCI India RIL

The India angle

RIL CAGR vs. SENSEX/NIFTYRIL CAGR vs. SENSEX/NIFTY

CAGR over 10Y 5Y 3Y 2Y 1Y

Reliance 28% 35% 15% -6% 75%

Sensex 12% 20% 10% 4% 110%Nifty 12% 19% 11% 3% 99%

Source: Bloomberg

Source: J.P. Morgan


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RIL vs. Sinopec and the peer group

FY08A FY09A FY07A FY08A

Oil production (bbl/d) 17,248 18,248 824,982 824,982

Gas production (bcf) 65 75 283 293

Oil reserves(MMT) 12 11 413 388

Gas reserves(bcf) 7,888 7,827 6,331 6,959

Refining throughput(MMT) 32 32 161 159

Ethylene production(000 tonnes) 1,891 1,850 6,534 6,289

GRM ($/bbl) 15.0 12.3 2.1 (7.8)

Crude Realization ($/bbl) 78 93 62 84

Gas Realization ($/mmbtu) 5.7 5.7 3.4 3.9

Refining & Marketing EBIT ($ mn) 2,570 2,106 3,717 (3,431)

Petchem EBIT ($ mn) 1,769 1,496 1,957 (1,927)

E&P EBIT ($ mn) 374 486 7,171 9,790

Net income 3,796 3,413 8,314 4,378

Cash from operations 5,239 4,949 17,587 9,958

CAPEX 4,560 6,983 16,074 15,779

ROE 28% 19% 20% 9%

ROA 13% 9% 8% 4%

Reliance Sinopec

Peer ValuationsPeer Valuations

Source: Bloomberg, J.P. Morgan estimates. Note: For RIL, data used is March 10/March 11. Prices as on March10, 2010

RIL vs SinopecRIL vs Sinopec

Source: Company data, J.P. Morgan

Price Market Cap P/B

US$ mn 2009 2010E 2009 2009 2010

RIL 1,008.8 72,116 20.4 12.4 3.23 11.2 20.5%

Petrochina 9.2 245,901 13.2 11.9 1.87 6.2 14.0%

Sinopec 6.1 77,575 7.4 7.2 1.45 4.7 17.0%

PTT 237.0 20,356 11.2 9.1 1.73 6.1 16.1%

FPCC 82.5 24,383 23.0 22.3 3.89 12.6 15.9%

FCFC 74.3 13,336 15.4 15.0 2.33 22.2 13.5%

SK-Energy 117,500 9,244 10.0 8.2 1.42 6.4 15.0%

S-Oil 57,700 5,549 10.3 9.6 1.86 6.6 16.0%

EV/EBITDAP/E ROE 2010E $mn EBITDA Capex FCF (EBITDA-Capex) Divvi paid Yield

CNOOC 8,716 7,216 1,501 2,799 3.8%Sinopec 21,861 15,766 6,094 2,431 3.6%

PetroChina 42,683 34,029 8,653 8,144 3.8%

Reliance 9,408 4,140 5,267 814 1.2%

Peer comparison cash flow generation/dividendsPeer comparison cash flow generation/dividends

Source: J.P. Morgan estimates


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RIL current outlook; valuations

! Undemanding valuations trading at historic average range

!Cyclical businesses continue to beat expectations

!Strong volume-led growth (20% earnings CAGR over FY09-12E)

!E&P expected to be ~44% of EBITDA (incl. RPL) from FY11E,

lowering cyclical component of earnings

!FCM impacts E&P reporting

Mean

+1SD

+2SD

-1SD

-2SD0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0


Trading at historic average multiples:Forward P/E

Trading at historic average multiples:Forward P/E

Source: Bloomberg, J.P. Morgan, Company data

RIL vs. India P/ERIL vs. India P/E

Source: Bloomberg, MSCI, IBES, J.P. Morgan, Company data

VOLUMES 2009 2010E 2011E 2012E

Refining (MMT) 33.0 62.0 63.5 63.5Petchem ('000 MT) 11,792 12,459 12,589 12,485

Gas production (mmscmd) 5.8 50.0 89.9 94.9

Oil production (bbl/d) 17,248 17,248 17,248 17,248

0

10,000

20,000

30,000

40,000

4QFY09 1QFY10 2QFY10 3QFY10

0

10,000

20,000

30,000

40,000

50,000

EBIT (Rs mn) E&P volumes (mn bbls)

EBIT growth moderate despite sharper E&P ramp-upEBIT growth moderate despite sharper E&P ramp-up


RIL production volumes significant ramp up over FY9-12RIL production volumes significant ramp up over FY9-12

Source: J.P. Morgan estimates, Company data

0

5

10

15

20

25

30

35


MSCI India RIL


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RIL current outlook

!Lyondell Basell acquisition will be earnings accretive upto $16bn, in our estimate

!High cash levels and potential to lever up Net Debt/Equity of 26% (FY11E)

!Ability to raise further cash through treasury stake sales

!RNRL court case unfavourable outcome could impact earnings by ~13% (FY11E)

!Delayed global economic recovery

Mar-11 Mar-12

LB EBITDA 76,657 96,303Additional Debt 752,000 752,000

Interest on new debt 65,800 65,800

Depreciation 23,794 24,983

Pre-tax earnings (12,937) 5,520

RIL pre-tax 342,866 353,759

% of RIL pre-tax -3.8% 1.6%

Mar-09 Mar-10 Mar-11 Mar-12

Lyondell Basell EBITDA 133,526 77,151 76,657 96,303

Reliance EBITDA 238,086 312,718 442,171 468,412

% of Reliance 56.1% 24.7% 17.3% 20.6%

LB earnings as % of RILLB earnings as % of RIL

Source: Company data, J.P. Morgan estimates, Lyondell Basell filings

LB deal accretive at < $16bnLB deal accretive at < $16bn

Source: J.P. Morgan estimates, Lyondell Basell filings


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RIL RNRL court case more colour

!Dispute stems from gas supply agreement between RIL and RNRL before demerger

!RNRL was under RIL control when supply agreement was inked hence new management claims

it is unjust

!

RNRL demands supply at $2.34/mmbtu!Bombay High Court ruled against RIL matter currently under appeal in Supreme Court of India

!Key issues before the Court

! Relevance of the family MOU, implementation of its provisions

! Government role in gas utilization, pricing

! Indian Courts have maintained the sanctity of family arrangements in business demergers in the

past. The Bombay High Court ruling does accord high relevance to the family arrangement

! Courts have in the past upheld that regulation of natural resources (such as water, gas) is the right

of the central government


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RIL Valuation

! March-11 price target of Rs 1150; Overweight rating

! Based on 12.5x FY12E EPS (adjusted for treasury shares)

! Factors ~20% earnings CAGR over FY09-12E with rising E&P revenues

! Key upside risk better than expected refining and petchem margins

! Downside risks lower gas prices (US$3.3/mmbtu), contingent upon RIL-

RNRL court case; and a prolonged global slowdown leading to lower refining

and petchem margins


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Disclosures

Companies Recommended in This Report (all prices in this report as of market close on 11 March 2010)

Reliance Industries Ltd (RELI.BO/Rs1,016.45/Overweight)

Important Disclosures

# Client of the Firm: Reliance Industries Ltd is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the

company non-investment banking securities-related services and non-securities-related services.

# Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the

next three months from Reliance Industries Ltd.# Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment

banking from Reliance Industries Ltd. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than

investment banking from Reliance Industries Ltd

Price charts (5 or fewer)


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Disclosures

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total returnof the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform inline with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelvemonths, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] J.P.Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is comparedto the expected total return of the FTSE All Share Index, not to those analysts' coverage universe. A list of these analysts is available on request. Theanalyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. If it does not appear in this presentation,the certifying analyst(s) coverage universe can be found on J.P. Morgans research website, www.morganmarkets.com.

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2009

Overweight(buy)

Neutral(hold)

Underweight(sell)

JPM Global Equity Research Coverage 42% 44% 14%IB clients* 58% 57% 42%

JPMSI Equity Research Coverage 41% 49% 10%

IB clients* 78% 73% 57%*Percentage of investment banking clients in each rating category.For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating

falls into a hold rating category; and our Underweight rating falls into a sell rating category.


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110310 ril everything u wanna know

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