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Removed from Asia Pacific Conviction Buy List
Reliance Industries (RELI.BO)
Equity Research
Limited scope for positive earnings surprise; off CL, D/G to Neutral
What happened
We remove RIL from our Asia Pacific Conviction list and downgrade it to
Neutral from Buy as we are concerned about lack of clarity on its sustainable
growth drivers, implying limited scope for medium-term earnings surprise
following 4Q results. While we had already assumed an absence of positive
triggers in E&P, the muted refining earnings came as a negative surprise to
us. Since adding to the Conviction List on January 17, 2011, RIL has gained
1.1% vs. India’s BSE30 Sensex gaining 3.7%. Since adding to the Buy List on
October 8, 2010, RIL has declined 3.7% vs. India BSE30 Sensex declining
3.3%. Over the past 12 months RIL has fallen 7.2% vs. the Sensex +10.7%.
Current view
Our positive stance on RIL was primarily based on strong earnings
momentum from the cyclical businesses – refining and petrochemicals,
potentially leading to consensus earnings upgrades. While petchem has
performed in line with our expectations, refining earnings have been well
below our estimates. This disappointment pushes back the earnings
upgrades further, in our view. We believe RIL’s refining margin either
implies lower correlation to Asian distillate cracks than we estimated, or
lower gains from the light-heavy oil price differential than historical trend.
We remain concerned about its E&P division owing to a lack of clarity on
D-6 production levels and slow progress in exploration acreage. While we
view the BP deal as strategically sound for RIL – with access to deepwater
technology and a valuation reference – we will watch for guidance on D-6
gas volumes over the medium term. RIL also indicated that it would be
challenging to profitably deploy cash of around US$9.5 bn.
We lower our FY12E/13E EPS by 11%/15% due to lower gas production and
to reflect BP’s 30% stake in 23 E&P blocks. We have also reduced the
EV/EBITDA multiples for RIL’s refining/petchem divisions, thereby revising
down our 12-m SOTP-based target price to Rs1,125 (prior Rs1,250). Key
risks: Downside: weak refining margin, low petrochemical margins;
Upside: faster-than-expected KG-D6 ramp-up.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Removed from Asia Pacific Conviction Buy List
Reliance Industries (RELI.BO)
Equity Research
Limited scope for positive earnings surprise; off CL, D/G to Neutral
What happened
We remove RIL from our Asia Pacific Conviction list and downgrade it to
Neutral from Buy as we are concerned about lack of clarity on its sustainable
growth drivers, implying limited scope for medium-term earnings surprise
following 4Q results. While we had already assumed an absence of positive
triggers in E&P, the muted refining earnings came as a negative surprise to
us. Since adding to the Conviction List on January 17, 2011, RIL has gained
1.1% vs. India’s BSE30 Sensex gaining 3.7%. Since adding to the Buy List on
October 8, 2010, RIL has declined 3.7% vs. India BSE30 Sensex declining
3.3%. Over the past 12 months RIL has fallen 7.2% vs. the Sensex +10.7%.
Current view
Our positive stance on RIL was primarily based on strong earnings
momentum from the cyclical businesses – refining and petrochemicals,
potentially leading to consensus earnings upgrades. While petchem has
performed in line with our expectations, refining earnings have been well
below our estimates. This disappointment pushes back the earnings
upgrades further, in our view. We believe RIL’s refining margin either
implies lower correlation to Asian distillate cracks than we estimated, or
lower gains from the light-heavy oil price differential than historical trend.
We remain concerned about its E&P division owing to a lack of clarity on
D-6 production levels and slow progress in exploration acreage. While we
view the BP deal as strategically sound for RIL – with access to deepwater
technology and a valuation reference – we will watch for guidance on D-6
gas volumes over the medium term. RIL also indicated that it would be
challenging to profitably deploy cash of around US$9.5 bn.
We lower our FY12E/13E EPS by 11%/15% due to lower gas production and
to reflect BP’s 30% stake in 23 E&P blocks. We have also reduced the
EV/EBITDA multiples for RIL’s refining/petchem divisions, thereby revising
down our 12-m SOTP-based target price to Rs1,125 (prior Rs1,250). Key
risks: Downside: weak refining margin, low petrochemical margins;
Upside: faster-than-expected KG-D6 ramp-up.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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