What brokerages have to say on Reliance Industries' Q1 results

Analysts are positive on the RIL stock and maintain "buy", "overweight" or "outperform" rating

For quarter ended June 2015, Reliance Industries' net profit grew 4.4% to Rs 6,222 crore as gross refining margins hit a six-year high. The company will also launch its 4G services in December  2015. Here's what leading brokerages have to say about the RIL stock.
 
Barclays: A strong 1Q FY16 as expected: OVERWEIGHT
Reliance’s 1Q FY16 EPS was in line but EBITDA was higher as refining margins rose to a 6-year high. Downstream margins may ease in 2Q, weighing on the shares near term after their 26% rise in the last four months (Sensex: +2%), but their medium-term outlook appears resilient, driven by benign demand-supply balances. This bodes well for Reliance, which is also likely to complete its key projects in the next year, driving EPS up 47% in FY15-18 along with higher ROCE and lower leverage. With valuations also moderate and expectations from its telecom project modest, we remain OW (overweight).

 
Citi: A ‘refined’ beat; Jio & core projects on track for end ’15/16: BUY

Operational beat, PAT in-line — RIL’s 1Q standalone EBITDA at Rs93.1bn rose 8% qoq and was ~4% higher than our estimate, primarily led by higher GRMs of $10.4 (4Q: $10.1, Citi: $9.5) despite lower Singapore GRMs ($8.0 vs. $8.5 in 1Q). Standalone PAT at Rs63.2bn (+1% qoq) was, however, in-line, with lower other income & higher DD&A offsetting lower-than-expected interest. 1Q consolidated EPS came in at Rs21/sh.
 
Refining: Big beat, though QTD margins lower — Led by strong gasoline cracks & favourable crude (Brent-Dubai) differentials, 1Q GRMs were at a 6-yr high, driving a 9% qoq improvement in refining EBIT (contributed 66% of consolidated EBIT). Sing GRMs have, however, weakened QTD ($5-6 vs. $8) as Middle East refiners ramp up, pressuring mid-distillate cracks ($8-9 vs. $14) and likely impacting RIL’s 2Q GRMs.

 
CLSA: GRM driven beat, growth projects to start soon – BUY
Reliance’s 1QFY16 standalone net profit of Rs 63.2bn was in line with our forecast. Ebit was 4% ahead due to a higher refining margin of US$10.4/bbl. At the analyst meet on its telecom plan, Reliance Jio said it did not see the need for handset subsidies and stuck to its December 2015 launch date, possibly pan-India. The launch and key downstream expansions are triggers. Despite sharp earnings expansion likelihood, the stock is below peer average valuations. BUY.
 
The company plans to use 75,000 base stations, 100,000 small cell sites connected to grid electricity and battery back-up to keep opex low. Jio does not see the need to offer handset subsidies due to the availability of affordable devices. The company is working with almost all the leading brands to ensure a wide range of devices and will also offer its own branded devices. It is confident of VoLTE working commercially and connecting seamlessly with 2G/3G devices. Jio should have an extensive distribution reach and aims to use content-based offerings and high 4G speed to attract consumers and differentiate itself from incumbents. Reliance’s ecommerce venture, covering lifestyle, B2B, digital, etc, will also be launched by the end of FY16.

 
Reiterate BUY: The company confirmed key downstream expansions will start in the next 12-15 months. These should drive a 75% rise in US$ EBITDA (ex-telecom losses) in the next three years. Along with the launch of telecom, these will be key triggers. The stock is within 15% of the March 2017 bear-case value, below global peers and near its own historical average valuations. Maintain BUY.
 
Credit Suisse: Maintain OUTPERFORM
The visibility on US$17 bn petchem expansion is increasing with over 70% of the capex already done. The last unit will commission Sep-16. This can drive a 20% dollar-EBITDA CAGR over FY16-18.

 
RIL materially increased disclosures on the telecoms segment. Large-scale testing will happen over the next few weeks, while the commercial launch is expected by Dec-15. Capital employed in the segment now equals ~22-23% of consolidated numbers. RIL's fiber network is 25% ahead of the nearest peer, Airtel.
 
As the expansions de-risk and positive news flow on the telecom launch (Dec-15) comes through, we expect the stock to OUTPERFORM. We update our models for FY15 annual report, a two-quarter delay in off-gas cracker and telecom valuation (now a 50% discount to Idea's IC). TP rises to Rs1,180; OUTPERFORM.
 

Low telecom expectations, petchem expansion de-risking to drive next phase of upside: We update our model for the FY15 annual report, delays in the off-gas cracker and increase expansion capex expectation to US$17 bn. As the expansions de-risk and the positive news flow on the telecom launch (Dec-15) comes through, we expect the stock to OUTPERFORM. We update telecom valuation to a 50% discount to Idea's EV/IC multiple (1.2x), thus implying a net negative value of US$5.5 bn in the SoTP or sum of the parts). Target price increases to Rs1,180 for 15% upside.
 
Deutsche Bank: Strong operating performance: BUY

1QFY16 results ahead of estimates; raising earnings and target price: RIL reported strong 1Q result, with net profit of Rs 63.2bn and EBITDA of Rs 93.1bn (highest in the past 15 quarters) beating our estimates on account of higher GRM of USD10.4/bbl (+20% YoY). While US shale gas EBITDA fell 57% YoY to $86mn due to lower oil prices, retail business EBITDA grew 19% YoY to Rs 2bn. We have raised FY16e EPS and target price marginally by 2% each. The refining and petchem capacity expansions are on track to get commissioned over the next 9-18 months. We reiterate Buy premised on a 16% CAGR in EBITDA over FY15-18E, driven by the commissioning of new capacities in petrochemicals and refining.

 
We have raised our FY16e EPS by 2% and valuation by 2% to INR1,100/sh to factor in the higher-than-expected refining margin in 1Q.
 
Management has reiterated the guided timelines on commissioning of refining and petrochem projects. Commissioning of the petcoke gasifier will start in phases from 4QFY16. New paraxylene capacity will be commissioned in 4QFY16 and ethylene off gas cracker in 3QFY17.
 
Morgan Stanley: F1Q16: Strong results; downstream execution and telecom launch on track: OVERWEIGHT
Standalone PAT of Rs63.2bn (+12% YoY, +1% QoQ) beat estimates by 5%, driven by strong refining. Consolidated PAT at Rs62.2bn was lower than standalone, driven by a weak US Shale. Downstream expansion is on track for phased commissioning from Jan-16. Telecom is gearing towards launch by end of year.

 
Refining outshined: Its highest ever EBIT of Rs51.4bn (+9% QoQ,+36% YoY) was driven by GRMs at US$10.4/bbl vs. MSe of US$9.4/bbl. RIL's spread over S’pore GRMs increased to US$2.5/bbl, which management attributed to higher gasoline cracks and lower energy costs and favorable crude differentials. RIL has restarted 450 of its 1400 retail fuel stations and the entire network is expected to be operational by F16e.
 
Strong Petchem EBIT came in line: Reported EBIT of ~Rs24.6bn (+16 QoQ, +30% YoY) was in line with our estimate. We see this as likely to improve even further as margins remain strong, and the full impact of recently commissioned PET and PTA capacities should be reflected in F2Q16 onwards.

 
Update on downstream expansion: RIL has spent ~US$12bn, or ~73% of planned downstream capex. Its update on projects suggests intensive construction activities at the Jamnagar complex. Utilities units will start in Dec-Mar'16 supporting commissioning of Gasification units (4QF16 in phases), PX (4QF16) and ROGC (3QF17). We see incremental EBITDA at US$3.2bn from downstream expansion projects and assume >50% benefit to flow in F17e.

RJio Telecom update: Total assets are at Rs920bn (US$15.3bn), which is ~20% of total capital employed. Management reiterated FY17e as the first full year of commercial operations, with launch by this Dec-end. It said the network is substantially complete and extensive beta testing will start in next few weeks. The company reiterated capex guidance of over Rs1000bn getting into the launch. At launch, RIL expects to have 80% population coverage through network infrastructure of 75k BTS, ~100k small cells, 250k rKms of fiber and 0.65mn sqft of data centre capacity.
 
UBS: Strong downstream growth + increased visibility on telecom: BUY
Strong positioning in downstream; more visibility shared on telecom strategy. Our takeaways from mgmt. meet:

1) Petchem profits to stay strong in 2Q, with July a good start particularly for polymer and polyester intermediaries margins
with new PTA, PX expansions increasing contributions;

2) GRMs to see seasonal weakness in 2Q but RIL mgmt. upbeat on favourable outlook in 2H with sustained gasoline
demand, its superior complexity advantages and likely global refinery capacity shutdowns (of ~600kbpd) over next few qtrs; 

3) Encouraging progress on downstream expansion ($12bn of the ~$16bn capex done) all of which will be operational in phases through 2016,

4) US Shale JVs profits under pressure, but low opex and pipeline asset sale for $1.07bn to help;

5) Telecom capex up at Rs930bn (vs Rs780bn in Mar'15) as launch nears; mgmt. shares insights on 'Jio growth strategy',
infrastructure ready for launch and operating cost efficiencies which was positive.

Catalyst: Downstream capex-led growth + 4G subscriber additions post launch: We think RIL's - 1) $11bn in petchem capex by 2016 driving 13% volume CAGR provide a good proxy to India's GDP recovery with better margin outlook, 2) higher GRMs of near $1/bbl due to gasifer starting in 2016 should offset concerns on KG-D6 and Shale profits due to low oil prices. We expect EBITDA growth trajectory to change with 16% CAGR over FY15-18E (vs 1% decline over FY11-15). Telecom capex is an overhang, however we think a successful launch technologically in Dec'15 and good subscriber addition could help offset the investors' extreme scepticism.
 
Investment case: We expect Reliance Industries’ (RIL) core petrochemical, refining and domestic exploration and production (E&P) businesses to improve over the next two years. Given the government's focus on encouraging domestic production, and steps to clarify on deep-water gas prices shortly, we think problems with KG-D6 should be resolved shortly, and gas production visibility could also improve. With the US$10bn petrochemical capex on track to become operational by 2016, its refinery cost advantages with the pet-coke gasifier operational by 2016 (enabling a steady US$8.5/bbl plus gross refining margin [GRM]), and retail also contributing to its EBITDA, we forecast a 16% EBITDA CAGR over FY15-18E (versus -1% in FY11-15).