Buy Reliance Industries says Nomura- Negatives priced in

 Action
RIL’s recent underperformance vs the Sensex has been glaring —15% YTD and
37% since its recent peak in May 2009. Delays in KG-D6 ramp-up and several
acquisitions (some in unrelated areas) are perhaps key reasons, but, in our view,
markets seem to be ignoring positives such as end of litigation, a sharp rise in
earnings (consensus: 38% growth in FY11F) and potential E&P upside. We think
the worst is being priced in. Maintain BUY and price target of Rs1,200.
 Catalysts
Any positive news flow on plans of monetising large inventory of discoveries.
Improvement in core business margins would be positive.
Anchor themes
RIL’s KG-D6 block was the key source of increased gas availability last year. In our
view, likely delays in further ramp-up in KG-D6 would not significantly impact Indian
gas growth as the country could increase LNG imports.




Negatives priced in
 Delays at KG-D6 a concern, but priced in
Delays in production ramp-up at KGD6, as the company undertakes
reservoir studies, have been a concern, resulting in the Street
lowering assumptions for gas ramp-up. However, we think the
earnings-cut cycle is now close to over and concerns on this front
have been priced in. We estimate an average 60/70mmscmd of gas
production in FY11/12F. We assume a peak of 80 mmscmd will be
reached only by end-FY12F.
 Unrelated acquisitions a concern but also priced in
In 1HFY11, Reliance made six investment/acquisition announcements.
Although most of these (except telecom) are quite small given RIL’s
size, we are concerned that several of these are unrelated to its core
business. Although more such investments are a risk and could
further dampen sentiment, we believe the recent underperformance
has already priced in the announced acquisitions.
 Earnings growth and E&P upside potential ignored
We expect RIL’s earnings to grow 34% in FY11F and 17% in FY12F
(consensus is higher at 38% and 21%, respectively). RIL also has a
large inventory of E&P discoveries — of its 52 discoveries only three
are currently in production. In our view, post the positive Supreme
Court ruling, the company could surprise with new E&P plans. In our
view, the market seems to be ignoring this potential upside.
 Reaffirm BUY
We see the current share price weakness as a stronger opportunity to
BUY for long-term investment. We maintain BUY and our price target of
Rs1,200.