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Good for the near term
ƒ Recent correction brings RIL to pre-BP deal levels
ƒ Refining & Petchem strength continues, E&P shortfall known
ƒ CMP factors in GRM of USD9.0bbl, D-6 at 45mmscmd
ƒ Reiterate BUY, unchanged TP of INR1,077; Refining offsets E&P
What’s the surprise on KG-D6
The recent sell-off in RIL has been driven
largely by news flow on DGH’s reactions
to the decline in production at KG-D6 and
its mandate to RIL to drill additional wells
in order to restore production. DGH has
also asked RIL to stop supplying gas to
non-priority sectors unless priority sector
agreements are fully honoured. None of
the above we believe is incrementally new
and, hence, should not have resulted in
the shares giving away ~9% in recent
trading and returning to pre-BP deal
levels. As we have maintained, while
partnering with BP (BP LN, not rated) may
not result in immediate benefits to production or improvements in RIL’s
E&P profile, it is a step towards de-risking its E&P portfolio. Our
sensitivity analysis suggests the current price factors in an average
production level of ~45mmscmd for the next 12 months, GRM of
USD9.0/bbl and EBIT margin for petchem of 14%. The potential to
surprise will depend largely on refining, but E&P not materially declining
from here should be viewed favourably as additional wells get drilled.
Refining strength offsets E&P for FY12E; FY13E upside
Refining continues to perform admirably on the back of higher demand
and delays in capacity additions, which should result in a tight demandsupply environment for the next two years, wherein we expect continued
refining strength (for details, see our regional refining note, Asia refining:
On a short upswing, 22 February 2011). RIL’s 4QFY11 results indicated
that the company’s ability to benefit from improving margins was lower
than expected (FCCU shutdown aside). However, we do not believe it to
be an issue that will result in a material disconnect between RIL’s refining
margins and its premium to SG complex. We raise our GRM estimates for
FY12 from USD9.5/bbl to USD10.5/bbl and for FY13 from USD10.0/bbl to
USD11.0/bbl. The decline at KG-D6 offsets the potential refining strength
in FY12, while we see a marginal EPS gain in FY13 on refining strength.
Valuations attractive, no material negatives hereon
We reiterate our BUY rating on RIL with an unchanged TP of INR1,077,
which implies about 13% upside from current levels. The stock is already
pricing in expectations of KG-D6 production falling to 47mmscmd. RIL's
long-term prospects remain uncertain as its new projects have a long
gestation period and hence the rewards will accrue only at a later date.
However, we believe the recent correction provides an attractive entry
point with near-term upside to be achieved on the back of refining gains,
which keeps us interested in RIL. Risks to our TP are: a steep decline in
KG-DG production and RIL’s inability to benefit from refining strength.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Good for the near term
ƒ Recent correction brings RIL to pre-BP deal levels
ƒ Refining & Petchem strength continues, E&P shortfall known
ƒ CMP factors in GRM of USD9.0bbl, D-6 at 45mmscmd
ƒ Reiterate BUY, unchanged TP of INR1,077; Refining offsets E&P
What’s the surprise on KG-D6
The recent sell-off in RIL has been driven
largely by news flow on DGH’s reactions
to the decline in production at KG-D6 and
its mandate to RIL to drill additional wells
in order to restore production. DGH has
also asked RIL to stop supplying gas to
non-priority sectors unless priority sector
agreements are fully honoured. None of
the above we believe is incrementally new
and, hence, should not have resulted in
the shares giving away ~9% in recent
trading and returning to pre-BP deal
levels. As we have maintained, while
partnering with BP (BP LN, not rated) may
not result in immediate benefits to production or improvements in RIL’s
E&P profile, it is a step towards de-risking its E&P portfolio. Our
sensitivity analysis suggests the current price factors in an average
production level of ~45mmscmd for the next 12 months, GRM of
USD9.0/bbl and EBIT margin for petchem of 14%. The potential to
surprise will depend largely on refining, but E&P not materially declining
from here should be viewed favourably as additional wells get drilled.
Refining strength offsets E&P for FY12E; FY13E upside
Refining continues to perform admirably on the back of higher demand
and delays in capacity additions, which should result in a tight demandsupply environment for the next two years, wherein we expect continued
refining strength (for details, see our regional refining note, Asia refining:
On a short upswing, 22 February 2011). RIL’s 4QFY11 results indicated
that the company’s ability to benefit from improving margins was lower
than expected (FCCU shutdown aside). However, we do not believe it to
be an issue that will result in a material disconnect between RIL’s refining
margins and its premium to SG complex. We raise our GRM estimates for
FY12 from USD9.5/bbl to USD10.5/bbl and for FY13 from USD10.0/bbl to
USD11.0/bbl. The decline at KG-D6 offsets the potential refining strength
in FY12, while we see a marginal EPS gain in FY13 on refining strength.
Valuations attractive, no material negatives hereon
We reiterate our BUY rating on RIL with an unchanged TP of INR1,077,
which implies about 13% upside from current levels. The stock is already
pricing in expectations of KG-D6 production falling to 47mmscmd. RIL's
long-term prospects remain uncertain as its new projects have a long
gestation period and hence the rewards will accrue only at a later date.
However, we believe the recent correction provides an attractive entry
point with near-term upside to be achieved on the back of refining gains,
which keeps us interested in RIL. Risks to our TP are: a steep decline in
KG-DG production and RIL’s inability to benefit from refining strength.
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