Neutral on Reliance Industries - Q3 Result Update - Motilal Oswal

Reliance Industries reported lower than estimated 3QFY12 EBITDA at INR72.9b (-24% YoY, -26% QoQ) led by (1) Lower GRM at USD6.8/bbl (est of USD7.7/bbl), (2) Lower petchem EBIT at INR21.6b (est of INR22.1b) led by lower margins and (3) lower E&P EBIT at INR12.9b (v/s est of 14.8b) led by higher than expected depletion. Impact of higher than expected D,D&A at INR25.7b (v/s est of INR24.8b) and interest cost at INR6.9b (v/s est of INR6.5b) was compensated by higher other income at INR17.2b (v/s est of INR13.5b) resulting in PAT at INR44.4b (-14% YoY and -22% QoQ). Other income contribution to PBT reached 30% in 3QFY12.

RIL to buyback upto 120m shares (3.7% of outstanding equity and 7% of free float): RIL board has approved share buyback upto 120m shares from open market at price not exceeding INR870/sh (17% premium to previous day closing of announcement on Jan 18) and aggregate amount not exceeding INR104.4b.

Operational Update: RIL's reported GRM at USD6.8/bbl (v/s est of USD7.7/bbl) resulted in a USD1.1/bbl discount to regional benchmark Reuters Singapore GRM of USD7.9/bbl in 3QFY12. Exports help to prevent volume decline in petchem EBIT. KG-D6 production (D1/D3+MA1 fields) was in-line at 41mmscmd (v/s 45.3mmscmd in 2QFY12) and currently is at ~38mmscmd.

Cutting FY12/FY13 estimates by 6%/8%: We cut our FY12/FY13 EPS by 6% and 8% to factor in the (1) lower GRM at USD8.6/8.2/bbl (earlier at USD9.2/9.4/bbl), (2) lower KG-D6 gas production at 43/35mmscmd (v/s earlier 43.5/ 38mmscmd) which is partly compensated by revised INRUSD at 48/50 (v/s earlier 47.7/48).

Valuation and view: In the context of RIL's recent investments in non-core businesses which are yet to provide any clarity on the returns, we believe that the buyback is the best possible option to deploy surplus cash. We expect the buyback offer will provide the support to near term stock performance in the midst of uncertain / subdued outlook on its core businesses. On FY13E basis, the stock trades at 11.5x FY13E adj. EPS of INR69.1 and EV/EBITDA of 7.5x. We maintain Neutral with a SOTP based target price of INR841/sh (earlier at INR896/sh) due to concerns on RoE reaching sub-14%, falling KG-D6 volumes and increased share (75%) of cyclical refining and petchem businesses.

Source : Equity Bulls

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