RIL: Marginally better than 1QFY11: Kotak Sec

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Reliance Industries (RIL)
Energy
Beats us. RIL’s 2QFY11 reported net income at `49.2 bn beat our expected `43.7 bn
with the positive variance arising largely from an unexpectedly strong performance of
the chemical segment. We note that global polymer margins and prices were significantly
lower qoq. We have fine-tuned FY2012-14E earnings to reflect (1) higher chemical
margins, (2) a stronger rupee and (3) lower oil production. We retain REDUCE rating on
the stock with a revised 12-month SOTP-based target price of `1,050 (`1,015 previously).






Marginally better than 1QFY11 and well ahead of our estimates
RIL’s reported 2QFY11 net income at `49.2 bn came marginally ahead of 1QFY11’s `48.5 bn but
well ahead of our `43.7 bn estimate. 2QFY11 reported EBITDA at `94 bn beat our `86.5 bn
estimate but was modestly ahead of 1QFY11’s `93.4 bn.

Performance of chemical segment surprising in light of weaker margins qoq
We are surprised by the performance of the chemical segment; 2QFY11 EBIT at `22 bn was higher
compared to 1QFY11’s `20.5 bn despite a sharp drop in global polymer margins and prices qoq.
2QFY11 refining margin improved to US$7.9/bbl (our estimate: US$7.8/bbl) from 1QFY11’s
US$7.3/bbl. Crude throughput at 16.9 mn tons came ahead of our 16.4 mn tons assumption.
However, E&P production volume declined by 29% qoq for oil and 3.8% qoq for gas reflecting
production problems at MA-1 oil and Panna-Mukta oil and gas fields.
Fine-tuned FY2011E EPS by +2.7% to `59 and FY2012E EPS by -2.5% to `73
We have fine-tuned FY2012E and FY2013E EPS by -2.5% and +1.1% to `73 and `85 to reflect (1)
higher chemical margins, (2) a stronger rupee; we now model FY2012E and FY2013E US Dollar-
Indian Rupee exchange rate at `44.5/US$ versus `46/US$ previously and (3) lower oil production
at MA-1 field. We see downside risks to earnings from (1) lower-than-expected oil and gas
production at D-6 block due to continued production issues, (2) implementation of IFRS from April
1, 2011 and (3) higher-than-expected taxation due to no income tax exemption on D-6 gas
production.
Fine-tuned FY2012E-based target price to `1,050 from `1,015 previously
We have fine-tuned our 12-month fair valuation to `1,050 from `1,015 previously. The higher
valuation of the chemical segment is offset by the exclusion of value of ‘cash’ in Petroleum Trust
that we had valued separately previously; it presumably already reflects in RIL’s standalone balance
sheet. We attribute `135/share to RIL’s NEC-25, CBM, KG D-3, KG D-9 and MN D-4 blocks.