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UBS Investment Research
Reliance Industries
Show me the gas
„ Lower gas volumes pulls down stock performance
Currently gas production from 18 wells at D1-D3 is ~42-45 mmscmd against the
Field Development Plan of ~53.4 MMSCD from 18 wells. While the Directorate
general of hydrocarbons, appears to be confident of a ramp up to 60mmscmd till
Mar ’11 there is no guidance/indication from Reliance on the ramp up now or later.
„ Ramp-up upto March ’11 will be a good indicator of progress
According to the FDP, 22 wells are to be on-stream within 2 years of production i.e
by Mar ’11. Technically, this is still easily possible – given 2 more wells are drilled
but yet to be put on production and 2 more can be ready by then. There are also
some concerns about whether ramp up to 80mmscmd will happen in 2012-13
(FY13) or 2013-14 (FY14) . If ramp up in FY13 and 14 is 70&80 mmscmd rather
than 80&90, as we incorporate, the EPS for the years drops by 5.9 and 5.4% resp.
„ Petchem and refining cycle bottoming out-support for the stock
We believe petchem spreads will have a more meaningful recovery in 2H11 and
forecast stronger margin expansion in 2012 as capacity addition slows and demand
recovers. Refining margins were better than expected in 2010 and we expect
complex refiners like reliance to benefit from margin improvements driven by
slower supply additions and stronger Asian demand.
„ Stock has underperformed as markets look for a catalyst
The stock has underperformed the sensex by ~15% in past 6 months. We base our
Rs1,150 price target on a sum-of-the-parts valuation. Currently the stock is trading
at 8.0x FY12e EV/EBITDA and 14.2x FY12e PE. We maintain a Neutral rating.
Q Reliance Industries
Reliance Industries (RIL) is the largest integrated oil and gas company in India.
Its three main businesses are exploration & production, refining and
petrochemicals. Its two refineries in Jamnagar, Gujarat have among the highest
complexity globally and a combined capacity of 1mbpd. The company's FY10
turnover was US$46bn. It derives more than 50% of its revenue from exports.
Q Statement of Risk
We believe gas volumes from KG-D6 are key drivers of the stock’s performance.
Refining and petrochemical margins are also major drivers of the company’s
earnings.
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