13 January 2011

Morgan Stanley: Reliance Industries Changing Tides: Upgrade to Overweight

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Reliance Industries, Upgrade to Overweight; Rs1,252 implies 21% upside.  RIL has underperformed the
BSE-SENSEX by ~14% in last 12 months and ~10% in last 6 months, making valuation look
attractive. Two of our three key concerns have been addressed. We were previously concerned
by all the three of RIL’s businesses.  We now believe two cyclical businesses, Refining and
Petchem, are both set to see improving margins.  Meanwhile, we remain concerned on RIL
possibly missing our E&P volume estimates of 80 mmscmd by June 2011.

F3Q results should highlight improved refining, petrochemical margins. Despite a 6-7% cut
in gas volumes due to reservoir-linked issues and a 15% lower refinery throughput due to a
planned shutdown, we estimate 1.4% sequential growth in EBITDA, and 5% in profits. We
forecast an impressive 55% YoY and 16% sequential growth in GRMs, and 18% YoY and 10%
sequential growth in petrochemical EBIT.
What’s in the price? At current levels, we believe the market is discounting Rs378/share for
E&P business. If we remove our DCF value of Rs318/share E&P, we believe that market is
attributing a very small valuation of Rs61/share as the optional value for RIL’s exploration
portfolio versus our estimate of Rs283/share.

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