Reliance Ind - 2Q FY11 in line; refining outlook improves: Daiwa

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Reliance Industries (RIL IN) Rating:2
2Q FY11 in line; refining outlook improves near term, still low visibility on gas ramp-up



What has changed?
• Reliance Industries (RIL) recorded net income of Rs49.2bn, in line with our
forecast of Rs48.8bn. Though gross refining margin was 30c better than our
forecast, other costs pulled down the EBITDA in line with our forecast.
Impact
• E&P update: The company maintained that KGD6 gas volumes will be capped
at 60mmscmd at least until 2Q FY12 and will be reviewed then. The D6 oil
output cap has also been scaled down to 25,000bpd from 28,000bpd.
• RIL is facing regulatory delays in the progress of its development plans for its
D6 satellite fields and NEC 25 amongst others. The company plans to drill one
exploratory well in D9, and one appraisal well is being drilled currently in D4.
• Petrochemicals: Polyester spreads and demand rose significantly, which more
than offset the decline in polymer spreads. The outlook for polyester prices for
the next 12 months remains bright, according to the company, given the high
cotton prices and delay in capacity additions. Capex on planned capacity
additions will start only from next year.
• Chemicals (PBR, butadiene and LAB) margins have also improved, and the
chemicals business now contributes almost 20% of total petchem EBITDA.
• Refining: The gross refining margin at US$7.9/bbl was slightly higher than our
forecast, but refining EBIT was in line due to a rise in costs. Planned shutdown
of one unit will affect 3Q volumes but the margin outlook is buoyant near term.
Valuation
• We retain our sum-of-the-parts-based target price of Rs1,056, which values the
petchem business at a 6x FY12 EV/EBITDA multiple, refining at a 7x FY12
EV/EBITDA and oil & gas at a 7x FY12 EV/EBITDA, on our forecasts.
Catalysts and action
• We believe the key to watch will be a further improvement in refining spreads
and stability in polymer spreads. The E&P business looks uneventful in the near
term at least. Over the medium-to-long term, we see many catalysts, including
an improvement in margins for cyclical businesses, higher gas volumes and
better pricing which should drive the share price, in our opinion. We retain our
2 (Outperform) rating.