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UBS Investment Research
Reliance Industries
K G-D6: Highly sensitive to capex
Event: We assess sensitivity of RIL’s earnings to key upstream drivers
We run a series of sensitivities on the a) the pricing of gas after FY14 b) gas
volumes and c) the capex invested in the KG-D6 fields to assess the impact on the
valuation of Reliance industries and on its FY12-16 EPS.
Impact: Earnings are most sensitive to capex, then pricing and volumes
We conclude that 1) earnings and valuation of KG D6 are very sensitive to capex
and 2) price and volumes have lesser impact on earnings and valuation than capex.
Capex has a perverse impact on valuation- If we add US$1 bn capex each in FY12
and 13 resp, then the valuation does not change but if we add another US$1bn to
FY12 capex then the valuation increases by 1.3% and this w/o change in volumes.
Action/Analysis: High sensitivity is due to the change in govt share formula
The key reason for the higher sensitivity to capex is the government share. The
government claims a part of the earnings from the field according to a pre
determined formula. The year when government share increases to the next band
can be delayed if there is higher capex that year, boosting company share instead.
We believe the RIL-BP alliance will need to put in more capex to ramp up or even
maintain production and hence downside to the value of earnings from the E&P
business for Reliance is limited.
Valuation: Maintain buy and SOTP based PT of Rs 1,170/sh
We value the petrochem/refining business at 7xFY13e EBIDTA and upstream on
NPV. At 6.2x FY13e EV/EBIDTA and 11.2x FY13e EPS stock is attractive vs.
Asian peers which are trading at 5.8x EV/EBIDTA, 8.8xEPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Reliance Industries
K G-D6: Highly sensitive to capex
Event: We assess sensitivity of RIL’s earnings to key upstream drivers
We run a series of sensitivities on the a) the pricing of gas after FY14 b) gas
volumes and c) the capex invested in the KG-D6 fields to assess the impact on the
valuation of Reliance industries and on its FY12-16 EPS.
Impact: Earnings are most sensitive to capex, then pricing and volumes
We conclude that 1) earnings and valuation of KG D6 are very sensitive to capex
and 2) price and volumes have lesser impact on earnings and valuation than capex.
Capex has a perverse impact on valuation- If we add US$1 bn capex each in FY12
and 13 resp, then the valuation does not change but if we add another US$1bn to
FY12 capex then the valuation increases by 1.3% and this w/o change in volumes.
Action/Analysis: High sensitivity is due to the change in govt share formula
The key reason for the higher sensitivity to capex is the government share. The
government claims a part of the earnings from the field according to a pre
determined formula. The year when government share increases to the next band
can be delayed if there is higher capex that year, boosting company share instead.
We believe the RIL-BP alliance will need to put in more capex to ramp up or even
maintain production and hence downside to the value of earnings from the E&P
business for Reliance is limited.
Valuation: Maintain buy and SOTP based PT of Rs 1,170/sh
We value the petrochem/refining business at 7xFY13e EBIDTA and upstream on
NPV. At 6.2x FY13e EV/EBIDTA and 11.2x FY13e EPS stock is attractive vs.
Asian peers which are trading at 5.8x EV/EBIDTA, 8.8xEPS.
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