Reliance Industries (RIL)’ net sales for 3QFY2016 declined by 27% yoy to
Rs68,261cr as against Rs93,528cr in the corresponding quarter last year, due to
fall in crude oil prices. The EBITDA however increased by 31% yoy to Rs11,368cr
(marginally below our estimate), led by strong gross refining margin (GRM) and
better-than-expected EBITDA of the Petrochemicals division. The GRM stood at
$11.5/bbl for the quarter, the highest in seven years, as against $7.3/bbl in
The Petrochemicals segment’s EBIT increased 28% yoy to Rs2,639cr, led by strong
polymer deltas and higher volumes. This aided in a 463bp yoy expansion in EBIT
margin to 13.6% during the quarter. Falling oil prices coupled with natural
decline in domestic oil and gas production, coupled with the challenging scenario
for the shale business resulted in an 89% yoy fall in the E&P segment’s EBIT. Store
additions in the Retail segment continued to remain strong with 187 stores added
during the quarter. RIL continued building the ecosystem for distribution of Jio
devices, gearing up for its roll out. We believe the Retail and Telecom businesses
would be the key growth drivers for the company in the coming years.
Outlook and valuation: We believe RIL’s growth in the coming years will be driven
by its core Refining and Petrochemicals business. We value the Refining business
at 8x EBITDA, while we retain the 6.5x multiple for the Petrochemicals business.
We value the Telecom business at 1x equity investment and Retail at 1x one year
forward revenue. We retain our Accumulate rating on the stock with a target price
of Rs1,120, implying a ~14% upside from current levels.

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