Sample  write-ups  
 Reliance Industries   
Vol. No. : 18    Issue No. : 43                             Wednesday, April 01, 2020

A reliable value creator

While the company’s refining and petrochemicals business are strong cash generators, its retail and digital services are strong growth drivers

 

Reliance Industries (RIL) is one of India'slargest private sector companies, with diverse interests, includingpetrochemicals, oil refining, and upstream oil and gas E&P. In the recentpast, RIL has diversified into newer businesses which includetelecommunications and organized retail. Oil refining is RIL's largestactivity, accounting for around 51% of the revenue in fiscal 2019, followed bypetrochemicals at around 22%, organized retail at around 17% and digitalservice at around 6% (all before interparty transactions)

 

Strong competitiveness in the global oil refiningbusiness

 

RIL's competitiveadvantage in refining arises from its global-scale capacity as the largestsingle-site refinery in the world, broad product portfolio, and highlyintegrated operations. The Jamnagar manufacturing division is the world'slargest refining hub with crude processing capacity of 1.24 million barrels perstream day (bpsd). It also enjoys the distinction of housing some of theworld's largest units, such as the Fluidised Catalytic Cracker (FCC), Coker,Alkylation, Paraxylene, Polypropylene, Refinery offgas (ROG) cracker andPetcoke gasification plants. Fuels from Jamnagar refinery are exported toseveral countries across the world. This complex refinery is future ready andcan produce gasoline and diesel of any grade. Reliance also has anotherrefinery – the sixth largest in the world – in the Special Economic Zone atJamnagar. This refinery has a capacity for processing 580,000 BPD of crude. TheJamnagar site benefits from a superior Complexity Index (CI) of 21.1, whichmakes it among the most complex in the world, enabling RIL to process crudes ofvarying specific gravity and sulphur content.

 

High utilisation ofthe refineries helps maintain strong operating efficiency and healthyprofitability. In addition, RIL's proximity to oil fields in West Asia (itsfacilities are located along India's western coast) gives it a logisticaladvantage, as it helps control transportation cost in procuring crude andexporting refined products.

 

Although grossrefining margins (GRMs) have been subdued in the recent past in line with theindustry, they have consistently been better than the benchmark Singaporemargins. RIL's strong competitive advantage has been enhanced by improvedenergy efficiency owing to the pet-coke gasification project, which wascommissioned and stabilised production recently. Over the long term, RIL plans totransform its operations to produce about 70% petrochemicals and 30% jet-fuels,to hedge the risk of flagging demand for automotive fuels.

 

Leadership in the petrochemicals industry in India

 

RIL is among the topglobal petrochemical manufacturers. It is the largest producer of Paraxylene,and the second largest for polyester fibre. Moreover, it is the fourth largestproducer of Purified Terephthalic Acid (PTA) and the fifth largest forPolypropylene. In India, RIL accounts for nearly half of the total domesticcracker (ethylene) capacity, and has a production share of more than 50 percentin the polymers (PE, PP and PVC) market. Its strong market position helps itoperate its petrochemical plants at full capacity and also benefits from itslarge scale. 

 

RIL completed itslarge capital expenditure (capex) plan in this segment in 2019, which hasincreased its manufacturing capacity significantly, with volumes increasingfrom about 22 million tonne (mt) in fiscal 2015 to over 37 mt in fiscal 2019.RIL now operates the world's largest ethane transportation and crackerfacility, which enables a sizeable import of the gas from North America. Thisprovides RIL with flexibility to operate on either Ethane or Naphtha (producedby its own refinery) as feedstock for its petrochemical operations, based onthe prevailing price dynamics. Moreover, it's 'Refinery Off-Gas cracker' (ROGC)project enables use of off gas, which is a by-product of its refinery.

 

RIL also benefitsfrom its extended value chain ' from feedstock to advanced materials such asglass fibers, carbon fibres, composites and other materials, some of which aremarketed under proprietary brands such as Recron, R Elan and RelWood.

 

Strong market position in the retail segment

 

Reliance Retail isIndia's largest retailer by revenue and profitability. The company's strongmarket position is reflected in its leadership position across several formatsand has been supported by consistent growth. The company has been expanding itspresence across tier-2 and 3 cities, with its presence reaching around 6,900cities by December 31, 2019.

 

Reliance Retailreported strong year-on-year revenue growth of 33% in the first nine months offiscal 2020 (including revenue for Jiophone sales and pre-paid recharges ofReliance Jio), driven by growth across all its consumption baskets: grocery,fashion, consumer electronics, connectivity, and petro retail. In this period,there has been a strong increase in revenue per store across formats, with thestores launched over the past few years gaining a foothold in their respectivecatchment areas. However, in the near term, sales in the fashion, consumerelectronics, and petro-retail consumption baskets will be affected by the NovelCoronavirus (Covid-19) outbreak.

 

Revenue market share leadership in telecom and continuedstrong traction in customer acquisition

 

With its aggressivecustomer acquisition strategy, Reliance Jio has built a strong market positionin a short time. With net addition of 90 million subscribers in the 12 monthsended December 2019, Reliance Jio has increased its subscriber base to 370million, with a market share 32%, thus becoming the largest player bysubscribers. In the mobile broadband space, it had a market share of 57.6% ason December 31, 2019. The company also achieved leadership in terms of telecomservices revenue market share by the first quarter of fiscal 2020.

 

Over the medium termrapid customer acquisition will continue. Moreover, a healthy increase inmonthly average revenue per user (ARPU) is expected in the fourth quarter offiscal 2020 because of tariff increase in December 2019. RJIL's market positionis supported by access to the telecom tower network of RJIPL (which has asuperior backhaul with 70% fiberization of its towers) and by its digitalecosystem comprising various applications and digital content besides voice anddata services.

 

December 2019 quarter performance

 

RIL achieved revenue of Rs 168,858 crore in Q3FY20 a decrease of 1.4% ascompared to Rs 171,300 crore in the corresponding period of the previous year.Decrease in revenue was primarily on account of 10.6% decline in order-to-cash(O2C) business revenues, with lower product price realization and 6.6% fall inBrent crude price. This was partially offset by continuing growth momentum inconsumer businesses. Digital Services and Retail business recorded an increaseof 36.2% and 27.4% respectively, in revenue during the quarter compared to thecorresponding quarter of the previous year. Exports (including deemed exports)from RIL’s India operations were lower by 13.7% at Rs 53,804 crore as againstRs 62,378 crore in the corresponding period of the previous year due to lowerprice realization from Petrochemical and Refining business. Higher sales volumeof Petrochemicals business products in domestic market also contributed towardsreduction in exports.

 

Segment EBITDA increased by 4.7% to Rs 23,500 crore from Rs 22,449 crorein the corresponding period of the previous year. The increase in SegmentEBITDA was led by strong performance in Retail (62.3%), Digital Services(43.5%) and Refining (11.7%) businesses. Reliance’s consumer businessescontinue to focus on delighting customers with a wide range of quality productsand services at compelling value. This along with a widening footprint isreflected in customer acquisition and scaling-up of consumer businessesrevenues. Other expenditure increased by 1.2% to Rs 21,202 crore as against Rs20,957 crore in corresponding period of the previous year primarily due tohigher network operating and regulatory & access charges.

 

GRM during the quarter stood at $ 9.2/bbl as against $ 8.8/bbl in theprevious year quarter and quarterly crude throughput was 18.1 MMT compared to18 MMT in Q3FY’19. KG-D6 production stood at 1.53 MMSCMD in Q3FY’20 compared to1.87 MMSCMD in Q3FY'19. Petrochemical production stood at 9.9 MMT compared to9.7 MMT. Reliance Retail operates covering an area of 26.3 million square feetas of 31st December 2019 compared to 20.6 million square feet as of 31stDecember 2018. Reliance Jio has subscriber base as of 31st December 2019 was370 million with net addition of 14.8 million during Q3FY20.

 

Finance cost was at Rs 5,404 crore as against Rs 4,119 crore incorresponding period of the previous year. Completion of projects, higher loanbalances and currency depreciation increased the finance cost by 31.2% Y-o-Y.Depreciation (including depletion and amortization) was Rs 5,545 crore ascompared to Rs 5,237 crore in corresponding period of the previous year.Increase in depreciation was primarily on account of additions of outlets inconsumer businesses and RJIL wireless Telecommunication networks.

 

PBT before EO rose 5% to Rs 15082 crore. The company reported an EOexpense of Rs 177 crore compared to nil in the corresponding previous yearquarter. In view of judgement dated 24th October 2019 of the Honourable SupremeCourt of India relating to the Adjusted Gross Revenue (AGR), Reliance JioInfocomm (RJIL), during the quarter, has recognized estimated liability for theperiod 2010-11 to 2018-19 towards License fees/Spectrum Usage Charges asExceptional Item (Net of Tax) of Rs 177 crore. PBT after EO was up 3% to Rs14905 crore. Profit after tax was higher by 13.5% at Rs 11,640 crore as againstRs 10,251 crore in the corresponding period of the previous year.

Segment wise Q3FY20 revenue from the refining &marketing segment declined by 7.2% Y-o-Y to Rs 103,718 crore while Segment EBITincreased by 11.9% Y-o-Y to Rs 5,657 crore with higher throughput and betterGRMs. RIL delivered robust performance in a volatile crude pricing environmentwith geopolitical tensions impacting freight markets and heavy crude sourcing.R&M segment revenue was impacted by decline in crude prices Y-o-Y. RILmaintained significant premium over Singapore complex margins with productyield optimization to take advantage of firm middle distillate cracks androbust risk management. GRM for 3Q FY20 was at $ 9.2/bbl.

Q3FY20 revenue from the petrochemicals segmentdecreased 19.1% Y-o-Y to Rs 36,909 crore due to lower price realizations acrossproduct categories. Petrochemicals segment EBIT was at Rs 5,880 crore down28.5% Y-o-Y, with significant decline in margins to near trough level for mostpetrochemicals products, as a result of new capacity, inventory overhang andglobal demand slowdown. The impact of lower margins was mitigated to someextent by increasing domestic market sales and optimizing light feed cracking.Domestic markets for Polymer and Polyester remained healthy during 3Q FY20.

Q3FY20, revenue for the Oil & Gas segmentdecreased 26.1% Y-o-Y to Rs 873 crore. Segment EBIT was at Rs (366) crore asagainst Rs (185) crore in the corresponding period of the previous year. Thesegment performance continued to be impacted by declining volume and prices.Domestic production was lower at 11.2 BCFe, down 15.2% Y-o-Y and production inUS Shale operations declined by 6.1% to 19.9 BCFe.

Retail revenue for Q3FY20 grew by 27.4% Y-o-Y to Rs45,327 crore from Rs 35,577 crore with accelerated store roll-out and strong LFLsales. Revenue growth was led by robust 35.7% growth in Consumer Electronics,Fashion & Lifestyle and Grocery segments. Segment EBIT rose by 58.0% Y-o-Yto Rs 2,389 crore from Rs 1,512 crore demonstrating strong operating profitduring the quarter. EBIT margin improvement is driven by robust storeproductivity, portfolio mix and operating efficiencies

Network18 Media & Investments Limited reported 3QFY20 revenue of Rs1,474 crore (down 3.3%) while segment EBIT was Rs 237 crore (up 404%). Digitalservice business reported 3QFY20 revenue of Rs 17555 crore (up 36.2%) whilesegment EBIT was Rs 3857 crore (up 63.3%).

 

Performance for the nine months endedDecember 2019

 

For 9MFY20 RILachieved net sales of Rs 471780 crore, an increase of 7% as compared to Rs 440601crore in the previous year. The company operating margins fell 30 bps to 14%.As a result operating was up 4% to Rs 65853 crore. Other income of the companyrose 90% to Rs 10405 crore. Interest cost rose by 38% to Rs 15963 crore.Depreciation fell 1% to Rs 15871 crore. PBT before EO as a result rose 7% to Rs44424 crore. The company reported an EO expense of Rs 177 crore compared to nilin the corresponding previous year period. PBT after EO was up 7% to Rs 44247crore. The effective tax rate fell to 25% compared to 28.9% owing to which thecompany's PAT increased 13% to Rs 33198 crore. Further considering share ofprofit of associate and joint ventures, net profit rose 13% to Rs 33006 crore.

 

Outlook

 

Refining - Decliningjet fuel demand with rising daily flight cancellations and declining gasolinedemand as people move less within cities have affected refining margins. Whilethe current scenario of Covid-19 lockdown in multiple countries points to weakoutlook on the back of decline in global oil consumption, leading to bothmargin and utilization risks, the positives for a complex refiner are materialcrude oversupply, heavy discounts and widening differentials

 

Petrochemicals -While the petchem demand scenario is tepid due to the reduction in consumptionin end-user segments such as automobiles, trade and durables, the sharpreduction in oil and feedstock (naphtha) prices can support deltas.

 

Retail - RelianceRetail businesses will be affected due to Covid-19-related disruption in Q4 ofFY2020 and Q1 of FY2021. Besides malls, even large outlets outside malls areshut across more and more states which will impact Fashion & Lifestyle(F&L) and Consumer Electronics (CE) segments. These segments may ultimatelybenefit from some pent-up demand once normalcy is restored, though lockdownsand delay in restarting business activity can also affect targeted expansionand may reduce discretionary spending, impacting growth of these segments.Favorable negotiations on rent reduction and significant cut-down in costs candrive some upsides.

 

Telecom - -Telecomremains one of the safest spots in the current scenario

 

Valuation

 

In FY 2020 and FY2021, we expect the companyto register EPS of Rs 68 and Rs 73.9 respectively. The scrip trades around Rs 1081.P/E on FY 2021 expected EPS works out to around 14.6.

 

 

Reliance Industries : Consolidated Financials

Particulars

1603 (12)

1703 (12)

1803 (12)

1903 (12)

2003 (12P)

2103 (12P)

Net Sales

293298

330180

408265

581020

605178

611230

OPM%

14.2

14.0

15.7

14.4

14.5

14.3

OP

41704

46194

64176

83918

85196

87406

Other Income

7479

9443

8862

8635

14339

14626

PBIDT

49183

55637

73038

92553

99534

102031

Interest

3691

3849

8052

16495

22081

23185

PBDT

45492

51788

64986

76058

77454

78847

Depreciation

11565

11646

16706

20934

21471

22545

PBT before EO

33927

40142

48280

55124

55983

56302

EO

-4574

0

-1087

0

177

0

PBT after EO

38501

40142

49367

55124

55806

56302

Tax

8876

10201

13346

15390

14054

14639

PAT

29625

29941

36021

39734

41752

41664

Share of profit/(loss) of associates

236

-108

59

103

256

287

Minority interest

-116

68

-5

-249

483

507

Consolidate Net Profit

29745

29901

36075

39588

41525

42458

EPS (Rs)*

46.9

47.2

56.9

62.5

65.5

67.0

EPS calculated on current equity of Rs 6339 crore; Face Value: Rs 10 each

Figures in Rs crore; (P) Projections EO: Extraordinary items

Source: Capitaline Databases

 

 

 

Reliance Industries : Consolidated Results

Particulars

1912 (3)

1812 (3)

Var.(%)

1912 (9)

1812 (9)

Var. (%)

1903 (12)

1803 (12)

Var. (%)

Net Sales

156802

160800

-2

471780

440601

7

581020

408265

42

OPM%

14.3

13.3

 

14.0

14.3

 

14.4

15.7

 

OP

22386

21317

5

65853

63086

4

83918

64176

31

Other Income

3645

2460

48

10405

5488

90

8635

8862

-3

PBIDT

26031

23777

9

76258

68574

11

92553

73038

27

Interest

5404

4119

31

15963

11601

38

16495

8052

105

PBDT

20627

19658

5

60295

56973

6

76058

64986

17

Depreciation

5545

5237

6

15871

15639

1

20934

16706

25

PBT before EO

15082

14421

5

44424

41334

7

55124

48280

14

EO

177

0

 

177

0

 

0

-1087

 

PBT after EO

14905

14421

3

44247

41334

7

55124

49367

12

Tax

3121

4069

-23

11049

11959

-8

15390

13346

15

PAT

11784

10352

14

33198

29375

13

39734

36021

10

Share of profit/(loss) of associates

57

24

 

136

35

 

103

59

75

Minority interest

201

125

 

328

184

 

-249

-5

 

Consolidate Net Profit

11640

10251

14

33006

29226

13

39588

36075

10

EPS (Rs)*

#

#

 

#

#

 

62.5

55.7

 

EPS calculated on current equity of Rs 6339 crore; Face Value: Rs 10 each

# EPS not annualized due to seasonality of business

EO: Extraordinary items

Figures in Rs crore

Source: Capitaline Databases

 

 

 

Reliance Industries: Consolidated Segment Results

Particulars

1912 (3)

1812 (3)

% to total

Var. (%)

1912 (9)

1812 (9)

% to total

Var. (%)

1903 (12)

1803 (12)

% to total

Var. (%)

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Petrochemicals

36909

45619

18

-19

113058

129651

18

-13

172065

125299

22

37

Refining

103718

111738

50

-7

302668

306144

49

-1

393988

306095

51

29

Oil & Gas

873

1182

0

-26

2586

3936

0

-34

5005

5204

1

-4

Organized retail

45327

35577

22

27

124725

93903

20

33

130566

69198

17

89

Digital Service

17555

12893

8

36

49829

34331

8

45

46506

23916

6

94

Others

4638

5707

2

-19

25308

14212

4

78

22151

12617

 

76

Total

209020

212716

100

-2

618174

582177

100

6

770281

542329

97

42

Less: Inter Segment Revenues

40162

41416

 

-3

110760

112044

 

-1

147472

111598

 

32

Less: GST recovered

12056

10500

 

 

35634

29532

 

 

41789

22466

 

 

Net Revenue from Operation

156802

160800

 

-2

471780

440601

 

7

581020

408265

 

42

 

 

 

 

 

 

 

 

 

 

 

 

 

PBIT

 

 

 

 

 

 

 

 

 

 

 

 

Petrochemicals

5880

8221

33

-28

20990

24198

39

-13

32173

21179

49

52

Refining

5657

5055

31

12

15122

15692

28

-4

19868

25869

30

-23

Oil & Gas

-366

-185

-2

98

-921

-1112

-2

-17

-1379

-1536

-2

-10

Organized retail

2389

1512

13

58

6201

3825

12

62

5546

2064

8

169

Digital Service

3857

2362

21

63

10259

6119

19

68

8784

3174

13

177

Others

663

376

 

76

1545

1086

 

42

1230

1636

 

-25

PBIT

18080

17341

96

4

53196

49808

97

7

66222

52386

98

26

Segment Assets

 

 

 

 

 

 

 

 

 

 

 

 

Petrochemicals

128,691

133,101

12

-3

128,691

133,101

12

-3

129,955

123,775

13

5

Refining

223,481

217,616

21

3

223,481

217,616

21

3

220,107

201,539

22

9

Oil & Gas

39,487

39,312

4

0

39,487

39,312

4

0

36,135

37,310

4

-3

Organized retail

44,634

35,227

4

27

44,634

35,227

4

27

35,560

24,433

4

46

Digital Service

256,888

302,317

24

 

256,888

302,317

24

 

360,404

249,730

 

 

Others

103,299

70,906

10

46

103,299

70,906

10

46

66,047

52,833

7

25

Unallocated

290,816

128,985

27

125

290,816

128,985

27

125

154,198

126,728

15

22

Total Segment Assets

1087296

927464

100

17

1087296

927464

100

17

1002406

816348

64

23

Segment Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Petrochemicals

13,874

29,589

1

-53

13,874

29,589

1

-53

84,432

79,660

8

6

Refining

152,350

140,837

14

8

152,350

140,837

14

8

193,397

167,221

19

16

Oil & Gas

41,501

42,866

4

-3

41,501

42,866

4

-3

54,160

47,210

5

15

Organized retail

26,246

20,150

2

30

26,246

20,150

2

30

22,508

14,925

2

51

Digital Service

186,119

196,750

17

-5

186,119

196,750

17

-5

150,083

148,747

15

1

Others

25,894

10,313

2

151

25,894

10,313

2

151

11,782

9,596

 

 

Unallocated

641,312

486,959

59

32

641,312

486,959

59

32

486,044

348,989

48

39

Total Segment Liabilities

1087296

927464

100

17

1087296

927464

100

17

1002406

816348

99

23

Figures in Rs crore

Var. (%) exceeding 999 has been truncated to 999

Source: Capitaline Databases

 


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