Reliance Industries, or RIL, reported in-line full year 2014 consolidated net revenue of Rs 4.46 trillion, up 9.3% versus the prior year. Earnings per share increased to Rs 76.50, up 8% versus the prior year. A weaker core refining and petrochemical performance was offset by higher other income, favourable currency movements, and faster ramp-up of U.S. shale gas output.
RILs economic moat rating stands at "none," with the global refining business being highly fragmented, and fiercely competitive. Cost advantage through a low cost feedstock is the key source of competitive advantage for a refiner yet Reliance buys globally traded crude. We maintain our fair value estimate of Rs 908 per share with the weaker petrochemical performance offsetting improvement in the refining business. At their current price of Rs 959 each, we think RIL's shares are close to fairly valued.
In the oil and gas segment (11% of EBIT), EBIT margin fell to 25.8%, down 690 basis points from last year due to a fall in the KG-D6 basin output in India. In the U.S., higher gas prices drove revenue up 45% to $893 million. Volume growth was as expected, and should average 27% annually over the next four years.
In the refining segment (50% of EBIT), revenue rose 8.4%, with EBIT 3.4% higher on flat volume, with favourable currency movements driving the gains. Paltry full-year refinery operating margins of 3.3%, versus 3.4% in 2013, are consistent with our thesis that increasing Asian refining capacity will keep a lid on refiner margins.
In the petrochemicals segment (31% of EBIT), a 10.4% revenue increase helped drive EBIT 8.1% higher, mainly due to higher prices. EBIT margins improved 50 basis points to 8.1%, supported by better polymer margins coupled with about 10% currency depreciation. Margins remain a far cry from the 14.6% achieved in 2010.
Our thesis: We continue to state that refining and petrochemicals are commoditized and cyclical, which is mirrored in our high fair value uncertainty rating.
Fair value estimate: Rs 908
Stewardship rating: Standard
Economic moat: None
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