Reliance Industries (RIL) net sales declined 35% to Rs70,901cr (15.3% ahead of street estimate) as against Rs109,797cr in the corresponding quarter last year due to fall in crude oil prices. EBITDA however increased 9% yoy to Rs10,704, way ahead of consensus estimate led by strong gross refining margins (GRM) and better than expected EBITDA of the petrochemical division. GRM stood at $10.6/bbl for the quarter, highest in seven years, as against $8.3/bbl in 2QFY2015 and was ahead of consensus estimates. The outperformance of $4.3/bbl over the Singapore GRM was also the highest in six years.
Petrochemicals segment revenue declined 20% yoy to Rs21,239 crore led by lower crude and feedstock prices. Segment EBIT however, increased 7.2% yoy to Rs2,531 crore led by strong polymer deltas and healthy polyester chain deltas, coupled with higher volumes. E&P business continues to drag profitability and the outlook from that business continues to remain weak. The retail division continues to add stores helping drive revenue growth. RIL is building up an ecosystem for distribution of Jio devices, which is gearing up for a roll out in a staged manner. Reliance Retail will be launching its own brand of 4G LTE smartphones under the brand LYF soon
Outlook and valuation: We believe RIL growth will be driven by the core refining and petrochemicals business. We value the refining business at 7x EBITDA, while we assign a 6.5x multiple for the Petrochemicals business. We value the telecom business at 0.3x invested capital, while retail is valued at 1x Sales. We retain our Accumulate rating on the stock with a target price of Rs1,050, implying a 10% upside from current levels.

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