Reliance Industries:Strong refining margin drives earnings beat

　　4QFY16 results: strong profit growth led by robust refining performance.

　　RIL reported strong 4Q results, with the highest ever net profit of INR73.2bn(+17% YoY), led by robust refining margin (GRM) of USD10.8/bbl (+7% YoY).

　　While refining EBIT was up 35% YoY to INR63.8bn, petchem EBIT was up 29%YoY to INR27.3bn. Over the next 12 months, RIL should commission projectswith investments of about USD30bn (60% of its market cap). Contribution fromcapacity additions in its core business and robust downstream margins shoulddrive EBITDA (ex-telecom) growth of c.45% over FY16-18e. We reiterate Buy.

　　Strong refining margin drives highest ever quarterly profit in 4QFY16.

　　RIL reported 4QFY16 net profit of INR73.2bn (+17% YoY, +1% QoQ) andEBITDA at INR107.3bn (+24% YoY, +4% QoQ), which was above our andconsensus estimates. Refining EBITDA rose 33% YoY to INR72.2bn (+1%QoQ), driven by a 7% YoY increase in GRM to USD10.8/bbl and loweroperating expenses. Petchem EBITDA also rose 31% YoY to INR38.5bn (+7%QoQ), led by strong polymer deltas as well as start-up of new PTA and PETcapacities. While KG D6 gas production fell 17% YoY to 9.6mmscmd, RIL’sshare of US shale production stood at 15.9mmscmd. On a consolidated basis,RIL reported 4QFY15 EBITDA of INR120.1bn (+22% YoY, +6% QoQ) and netprofit of INR73.9bn (+14% YoY, +0.4% QoQ).

　　New projects start-up delayed to 2HFY17, core business capex rises USD1bn.

　　Commissioning of the refining and petchem projects will be delayed by about aquarter, whereas estimated refining and petchem capex has risen by USD1bnto USD18.5bn. While commissioning of the petcoke gasifier will start in phasesfrom end-2QFY17, paraxylene capacity will be commissioned in 2HFY17 andethylene off-gas cracker in 3QFY17. Management expects commercial launchof the telecom venture RJio over the next few months. Capital employed inRJio currently stands at ~INR1.2trn (~USD18bn).

　　Valuation and risks.

　　We value refining and petrochem on 6.5x FY17E EV/EBITDA and E&P andtelecom on DCF. Risks: 1) lower downstream margins; and 2) policy vagaries.