Reliance Industries:- Downgrade to N: Upstream concerns:: HSBC Research,

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Reliance Industries (RIL IN)
Downgrade to N: Upstream concerns
 The media reports that CBI has begun investigating possible
dealing between Indian energy companies and the oil ministry
 This could result in a freezing of bureaucratic decision
making, which would hamper RIL’s ability to carry out E&P
activities effectively in its blocks
 We downgrade to Neutral and lower our SOTP-based target
price to INR1,040 from INR 1,084 on concerns about slower
progress in oil & gas and lowering of exploration upside

The media reports that India’s Central Bureau of Investigation (CBI) is scrutinising 

the oil ministry's role in dealing with energy companies: On June 14, The Economic 

Times reported that India’s CBI has started an enquiry into the oil ministry’s dealings with 

private sector energy companies. We believe that this could result in a sudden freeze of 

government decision-making particularly related to production sharing contracts for oil & 

gas blocks despite the fact that such approvals are critical for effective operations. The 

state auditor recently published the Comptroller & Auditor General (CAG) draft report, 

mentioning gold plating by RIL in developing the KG-D6 gas field, may also act as a 

negative catalyst. We fear the standoff could linger due to already raging controversy 

related to allocation of 2G spectrum that was brought to the fore by another CAG report.  

Downstream outlook positive but concerns about upstream mount: While we 

maintain the regional refining margins at USD6 and USD6.5 for FY12e and FY13e 

(equivalent to USD9.5 and USD10/barrel margin), we anticipate a 2% reduction in 

petrochemical margins from the highs of Q4FY11 for Poly Ethylene and c20% for 

Polyesters, in line with forecasts by CMAI. However, we believe that exploration upside 

from the E&P blocks are at risk due to: first, it being the slower work in various blocks 

and second, given the lowering of gross reserve estimates by the JV partner of RIL.  

Valuation and risks: Our TP is based on a SOTP. We continue to value the E&P 

business on a DCF for producing properties, on reserve multiples for discovered fields, on 

the average of EV/EBITDA and PE for the refining & petrochemical business and 

investments at book value. We are lowering upside from the E&P fields, to reflect RIL’s 

JV partner, NIKO, recent decrease to gross reserves from its India operations. As a result, 

out TP falls to INR1,040 from INR 1,084. There could be upside and downside risk to our 

estimates if the refining and petrochemical margins, production ramp-up from the D6 

block and INR rates are different from our assumptions. A USD1/barrel change in refining 

margin would affect our valuation by INR70/share