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Reliance Industries Ltd.
Refining & chemical recovery
may end underperformance
Where we are
1H FY11 EPS up 30% after two flat years
Reliance Industries’ (RIL) 1H FY11 earnings rose 30% YoY after being flat for two
years (FY09-FY10). One of the main earnings drivers was the 21% YoY rise in its
refining margin from the low of FY10. RIL posted record high petrochemical EBIT
of US$1.8bn in FY10, and its petrochemical EBIT in 1H FY11 was flat. However,
one disappointment was the delay in ramp-up of KG D6 oil and gas production.
Where we are going
Refining margins strengthened further in 3Q FY11, driven by the record rise in
global demand for oil. We assume RIL’s refining margin will rise 18% YoY in FY11E
to US$7.9/bbl and 15% YoY in FY12E to US$8.9/bbl. We also expect petrochemical
margins to rise in FY12E. KG D6 oil and gas volumes are likely to remain flat in
FY12E as per RIL’s guidance. However, there may be positive news flow in E&P in
terms of increase in discoveries and reserves. RIL is likely to drill in highly
prospective blocks like KG D6, Mahanadi D4 and KG D9 in the next 12 months.
Investment conclusion for 2011
RIL has underperformed the BSE-30 by 37% since April 2008, mainly due to flat
earnings in FY09-FY10, earnings downgrades over the past 24 months and
disappointment in KG D6 ramp-up. There may still be no EPS upgrades.
However, improving refining and petrochemical margins may help ensure over
20% EPS rise in FY11E-FY12E and improve stock performance. However, what
could hurt stock performance is a large acquisition which investors may not like.
We retain Buy on RIL with PO of Rs1,210 (14% upside potential on the closing
price as of December 16).
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