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Reliance Industries
Focus on value - Upstream for free
Event
In this report we focus on value, given a 21% YoY fall in the stock price over
the past 12 months (vs a 6% rise in the Sensex), primarily due to concerns
about the upstream business. We argue RIL’s refining and petrochemical
businesses alone account for as much as Rs 752/share in value, suggesting
that the upstream business is available for free (Fig 2).
Impact
Upstream concerns likely to remain in the near term: RIL’s gas volumes
shall remain subdued during the near term, as three new wells shall be drilled
only next year. Similarly, CAG’s recent report suggesting that the regulator
granted undue benefit to private companies is yet preliminary and hence
further investigations and negative news flow may persist in the near term.
Super-conservative upstream value: We have valued the upstream
business at Rs169/share i.e. US$9bn. This is after assuming a 30% discount
for upstream, a 15% conglomerate discount and in fact no option value for
MND4, KGD4, Cauvery, etc. Notably, once the 30% stake sale to BP in
upstream assets is cleared, RIL shall get US$7.2bn cash and US$1.8bn
option value. Hence this transaction values RIL’s upstream business at
~US$21bn- 27bn versus our estimate of US$9bn.
10% upside even if we write off upstream value of Rs169/sh altogether. We
believe Rs941 is the value of other business, even after stripping out a 15%
conglomerate discount given diversifications.
Valuation sanity check: RIL quotes at a 20-40% PBV discount to Asian
petrochemical and refinery peers (Figs 3). Similarly, it quotes at the lower end
of its historical PBV and EV/EBIDTA price bands (Figs 5-7).
Potential cyclical valuation kicker: We expect GRMs to remain strong for
the next 3 years as global utilisation rates rise to 95%. Petchem margins have
been typically quite steady for RIL even through cycles as its polyester and
polymer businesses are typically counter-cyclical to each other (Fig 17).
Nevertheless, global consultants CMAI forecast a prolonged upturn for
polyester coinciding with a polymer chain margin revival. Our analysis
suggests that prior to the last cyclical upturn during the FY04-08 period RIL’s
PBV had re-rated from 1.5x to 4x (Figs 25-26).
Earnings and target price revision
We cut FY12-13E PAT estimates by 4-5% as we lower probability of KGD6
production rise in the medium term, and increase in refinery opex due to nonavailability
of cheap gas. We have reduced TP to Rs 1084 (from Rs 1239) by
introducing a risk-weight of 30% on upstream value due to the CAG overhang.
Price catalyst
12-month price target: Rs1,084.00 based on a Sum of Parts methodology.
Catalyst: Settlement of CAG issues; Clarity on KGD6 plans; BP deal approval
Action and recommendation
While uncertainty on upstream may continue in the near-term, current
valuations make a strong case for accumulating RIL at opportune times as a
storehouse of long-term value and a play on the cyclical upturn in progress
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