As Reliance Industries nears completion of a significant capex cycle over next 12 months, return ratios are likely to improve in the medium term, driven by strong earnings accretion from core business and a rational strategy in telecom business, a brokerage said.
"RIL generated a dismal 7 per cent RoACE (Return on average capital employed) in FY2015 at the consolidated level, with an effective capital of $69 billion employed as of end-FY2015, including creditors for capital expenditure.
"However, if we remove USD 28 billion of capital WIP (work in progress) and USD 14 billion of cash/investments, business RoACE (including retail and US shale) appears healthy at 13 per cent, higher compared to 10-11 per cent in 2013-14," Kotak Institutional Equities said in a report.
This is because of higher refining and petchem margins and improvement in performance of retail and US shale.
"We expect USD 17 billion of investments in core-business projects till FY2017... to drive robust 57 per cent growth in standalone EBITDA and yield 14 per cent adjusted CRoCI (Cash return on cash invested) in FY2018, despite assuming a moderation in global benchmark margins from current high levels," it said.
Core projects are less attractive in an environment of lower crude prices but the effective negative impact is restricted to petchem projects, as reduced incremental benefits from petcoke gasification are offset by better underlying margins for complex refiners (such as RIL) due to a lower LNG price.
Kotak said it estimates about $17 billion of cumulative investments in telecom by FY2017, including $13 billion in reported assets of Reliance Jio as on end-FY2015, $1.1 billion of liability for spectrum acquired in March 2015 and $3 billion of incremental investments. RIL has invested $5 billion of equity.
Kotak said it expects the company to commence telecom services by August in order to achieve the minimum rollout obligations as specified by Department of Telecom.
"As RIL nears completion of a significant capex cycle over the next 12 months, we expect return ratios to improve in the medium term, driven by strong earnings accretion from core-business projects and assuming a rational strategy in the telecom business," it added.
RIL, it said, was making good progress in construction of petcoke gasification project, which is expected to reduce the cost of energy and hydrogen for refineries by substituting imported LNG with synthetic gas produced from petcoke/coal.
Stating that petchem expansion projects were on track, Kotak said RIL has undertaken capacity expansion projects across ethylene and polyester chains, which are expected to commission over the next 12 months in various phases.
RIL is in advanced stage of execution of its refinery offgas cracker at Jamnagar, which is expected to produce 1.4 million tons of ethylene and 0.2 million tons of propylene, using off-gases from the refineries as feedstock.