Reliance Industries 2QFY11 results: few surprises:: RBS

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Reliance Industries
2QFY11 results: few surprises
RIL’s 2QFY11 net profit was as we expected. Going forward, we think petchem
margins could be above expectations (as in 1HFY11), with disappointments in
E&P. There appears to be limited clarity on development of existing discoveries
and new large discoveries are yet to materialise. Retain Sell; Rs855 target price.

2QFY11 results largely in line
RIL reported net profit of Rs49.23bn (up 28% yoy, 1.5% qoq), 2% above our expectations.
Petchem/E&P profits were higher than expectations, while profit in the refining business was
lower than expected. EBITDA and net profit for 1HFY11 were 50% and 51% of our full-year
forecasts, respectively. Net profit for 1H was up 30% yoy with EPS rising 23%. Our EPS and
target price forecasts are based on net shares (excluding treasury stock), which have gone
up by 5% yoy. We are maintaining our net profit estimates, which are 13% below Bloomberg
consensus in FY11 and 23% below in FY12.
Net debt has risen on a consolidated basis
Net debt for RIL (standalone) was Rs388bn at end-2QFY11, compared to Rs406bn at end-
4QFY10. However, we estimate that the subsidiaries floated by RIL for telecom broadband
operations and the acquisition of shale gas hold an additional debt of Rs140bn. Thus, we
believe net debt on a consolidated basis is likely to be much higher at around Rs528bn.
About 75% of the cash outgoing on creditors for capex and fixed assets in 1HFY11 was
attributable to E&P and the balance largely to refining. Spending on the new petrochemical
projects RIL has announced is yet to commence.

Retain Sell, target price Rs855
We maintain our Sell rating and Rs855 SOTP-based target price. We believe the
petrochemical business has the potential for a positive surprise as profitability to date has
been above expectations (because of the slow ramp-up in global capacity and the significant
price premium for domestic polymers). However, E&P looks set to disappoint, as our
valuation for this business (Rs457/share) includes significant value from new
fields/discoveries, for which visibility is limited at this juncture.