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Buy
Reliance Industries (RELI.BO)
Return Potential: 27% Equity Research
Fresh cash inflow offers option of special dividend vs. reinvesting
Source of opportunity
Per the terms of the recent announcement, the BP deal is expected to bring in
US$7.2bn (pre-tax) of cash to RIL in FY12E. On top of the US$4.4bn in free
cash flow we are already forecasting, this would imply a net cash position
against its Dec 2010 net debt of US$8.6bn. Assuming free cash flow of
US$20.2bn between FY12E-14E, we believe RIL will have meaningful surplus
cash that it could reinvest at a higher than current CROCI of 12% or pay out via
special and/or regular dividends. (The company has not publicly commented
on its potential use of cash.) In most cases over the last five years of special
dividends in India, the shares have risen on such announcements.
Catalyst
(1) Continued strength in refining margins leading to consensus earnings
upgrades; (2) recovery in ethylene cycle in 2HFY12E adding to strong
polyester margins; (3) positive update on D-6 production ramp-up or
exploration progress; (4) newsflow on cash deployment or any possible
payout; (5) progress in the new telecom venture and retail business; and
(6) depreciation of INR-US$ exchange rate.
Valuation
We maintain RIL on our Conviction Buy list with an SOTP-based 12-m TP
of Rs1,250 (27% upside potential). We think the BP deal sets a valuation
reference for the E&P business. We see compelling risk-reward at current
levels as we estimate the stock is not pricing in the cyclical upswing in the
refining and potential recovery in ethylene cycle. Even assuming flat E&P
volume growth in FY12E, we are about 10% ahead of RIL’s Bloomberg
consensus earnings due to better refining estimates and weaker INR-US$ forecasts.
We value RIL’s refining at near trough-cycle multiples, petchem at troughcycle and the E&P business as a mix of DCF and EV/boe multiples.
Key risks
1) Delay in ethylene recovery; 2) expensive acquisitions; 3) weak refining.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACTION
Buy
Reliance Industries (RELI.BO)
Return Potential: 27% Equity Research
Fresh cash inflow offers option of special dividend vs. reinvesting
Source of opportunity
US$7.2bn (pre-tax) of cash to RIL in FY12E. On top of the US$4.4bn in free
cash flow we are already forecasting, this would imply a net cash position
against its Dec 2010 net debt of US$8.6bn. Assuming free cash flow of
US$20.2bn between FY12E-14E, we believe RIL will have meaningful surplus
cash that it could reinvest at a higher than current CROCI of 12% or pay out via
special and/or regular dividends. (The company has not publicly commented
on its potential use of cash.) In most cases over the last five years of special
dividends in India, the shares have risen on such announcements.
Catalyst
(1) Continued strength in refining margins leading to consensus earnings
upgrades; (2) recovery in ethylene cycle in 2HFY12E adding to strong
polyester margins; (3) positive update on D-6 production ramp-up or
exploration progress; (4) newsflow on cash deployment or any possible
payout; (5) progress in the new telecom venture and retail business; and
(6) depreciation of INR-US$ exchange rate.
Valuation
We maintain RIL on our Conviction Buy list with an SOTP-based 12-m TP
of Rs1,250 (27% upside potential). We think the BP deal sets a valuation
reference for the E&P business. We see compelling risk-reward at current
levels as we estimate the stock is not pricing in the cyclical upswing in the
refining and potential recovery in ethylene cycle. Even assuming flat E&P
volume growth in FY12E, we are about 10% ahead of RIL’s Bloomberg
consensus earnings due to better refining estimates and weaker INR-US$ forecasts.
We value RIL’s refining at near trough-cycle multiples, petchem at troughcycle and the E&P business as a mix of DCF and EV/boe multiples.
Key risks
1) Delay in ethylene recovery; 2) expensive acquisitions; 3) weak refining.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Neutral
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