Macquarie Research: Reliance Industries to Outperform

Reliance Industries e-survey: Poll vault!
Event
􀂃 Independent, global investor survey: We conducted an independent poll of
global investors through an e-survey to gauge perception, stock ownership
and potential triggers for RIL. Weighted analysis of the 60+ responses
representing US$66bn investments in India revealed that…
􀂃 …investors have a neutral mindset, but portfolios are underweight RIL
(see Fig 1): Our survey concludes that investors are more underweight than
negative; suggesting that stock outperformance should follow, to bridge the
gap.
Impact
􀂃 Reasons for YTD underperformance, according to investors, include delay
in KGD6 ramp-up, unrelated diversifications, a lack of fresh triggers and the
overhang of a treasury stock sale.
􀂃 15% conglomerate discount: Investors believe a 15% conglomerate
discount to intrinsic value should be attributed to RIL, following its recent
unrelated diversifications into broadband and hotels. Some investors prefer
higher dividends and desire improved information flow and clarity on strategy.
􀂃 Key triggers: Investors believe that the key triggers would be a cyclical
recovery, announcements of domestic upstream finds and clarity on timing of
KGD6 gas ramp-up to 80 mmscmd. Surprisingly, high potential shale gas
acquisitions, for which RIL has recently committed US$ 3.4bn, did not feature
as a key trigger. Perhaps, a lack of understanding of shale gas could be a key
reason.
Earnings and target price revision
􀂃 No profit change. We cut TP 3% to Rs1,244 from Rs1,290 to reflect the
perceived discount.
Price catalyst
􀂃 12-month price target: Rs1,244.00 based on a Sum of Parts methodology.
􀂃 Catalyst: Cyclical recovery, upstream upsides; clarity on KGD6 ramp-up.
Action and recommendation
􀂃 We believe that the markets have overreacted to the unrelated diversifications
by RIL and have penalized the RIL stock far beyond merit. Further, we think
that the gap between perception and ownership of the stock is too large and
shall be filled in soon, as many investors are currently ‘sitting on the fence’
and awaiting any positive news flow.
􀂃 Triggers coming through; Outperform: Our contention is that key triggers
highlighted by the investors have already begun to fructify, with a revival in
GRMs as well as statements by RIL partner Niko Resources’ (NKO CN,
CD$98.82, Not rated) chairman regarding the potential of MN-D4 (100 TCF
resources possibly), NEC-25 (six new finds this year) and probability of
KGD6 ramp-up in volume, and possibly price as well.