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Reliance Industries: Time to accumulate…
Reliance Industries is India's largest private sector company operating in
three key business segments: petrochemicals, refining and oil & gas
exploration and production (E&P) business. It has crude refining capacity
of 60 MTPA in Jamnagar and is India’s largest private petrochemicals
player. Reliance has made India’s largest gas discovery in the KG-D6 field
and is currently producing 60 mmscmd of natural gas. The stock has
underperformed the Sensex by 17.5% in the past year due to delayed KGD6
production ramp up, unrelated ventures in telecom and hotels.
However, at the CMP of Rs 1083, we believe triggers like positive news
flow on the E&P front, marginal improvement in the refining business, etc
would provide upsides to the stock, going forward.
New discoveries in E&P business may provide positive upside
Reliance Industries has a busy exploration and drilling schedule in
the Krishna Godavari (KG) fields over the next 12-18 months. We
believe drilling of over 12 exploratory/appraisal wells in prospective
areas like KG D3, MN - D4 and NEC fields could provide positive
news flow on discovery side for the company. Also, Reliance
venture in the shale gas business via three acquisitions would start
contribution to the profitability from FY13E.
Improvement in Singapore GRMs in last quarter
The Singapore gross refining margins have improved from $3.8 per
barrel in Q1FY11 to $4.1 per barrel in Q2FY11 mainly on account of
higher diesel spreads. Also, increase in heavy-light crude oil
differential would benefit complex refiners like Reliance. We expect
the Singapore GRMs to remain stable around current levels in the
next few quarters.
Valuation
Reliance is trading at 14.2x and 12.1x FY12E and FY13E EPS, respectively.
New discoveries in the east coast of India, development of shale gas
blocks, marginal improvement in the refining business and successful
diversification in new business could provide upsides to the stock, going
forward.
Technical Outlook
• The stock has witnessed a relatively muted performance in the current
rally vis-à-vis the sector as well as the broader indices
• An important technical observation to be made on the long term charts
is that the share price movement since late May 2009 till date appears
to have occurred in a well defined “Symmetrical Triangle” pattern as
highlighted in the adjoining monthly candlestick chart
• A sustained close above 1100 levels would result in a break-out from
the said pattern and the stock may see significant outperformance in
the coming months. Measuring implication of the price pattern
projects potential upsides to the tune of Rs.350-400 over the medium
term.
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