BUY Reliance Industries: Long-term E&P value not priced in • Daiwa

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Long-term E&P value
not priced in
• Mixed outlook for core business; refining appears healthy while
petrochemical is undergoing a downturn
• Low gas output appears to be in the price, with the share price
attributing a low value to the E&P segment, in our view
• Six-month target price lowered to Rs1,010, but Outperform rating
maintained as we are comfortable with valuations



􀂃 What's new
We believe the recent share-price
underperformance and what we see as
the stock not adequately reflecting the
long-term value of the E&P segment
have led to an attractive opportunity
to buy into the stock.
􀂃 What's the impact
We expect demand for oil and refining
capacity to be relatively balanced in
the Asia-Pacific/Middle East refining
sector over the 2011-12 period, and
believe robust refinery utilisation rates
in the region should support refining
margins. We forecast the refining
segment’s EBITDA to account for 42%
of the company’s overall EBITDA by
FY13, and be its main earnings driver.
We are cautious about the mediumterm
outlook for the petrochemical
segment, due to the slowdown in
economic growth in the region,
coupled with a possible increase in
supply as a result of additional new
capacity. We forecast a 17.3% YoY
decline in the petrochemical segment’s
EBITDA for FY12.
We have adjusted downward our FY12
and FY13 gas-output assumptions for
Reliance Industries (RIL) from
50mmscmd and 55mmscmd to
47mmscmd and 49mmscmd,
respectively, due to the drop in gas
output at the KGD6 field. Overall, we
have revised down our FY12 and FY13
EPS forecasts from Rs73.6 and Rs83.2
to Rs69.6 and Rs77.9, respectively.
􀂃 What we recommend
We have lowered our SOTP-based sixmonth
target price to Rs1,010 from
Rs1,085, but maintain our Outperform
(2) rating. We value the refining and
petrochemical businesses at one-yearforward
EV/EBITDA multiples of 7.5x
and 8x, respectively, and the E&P part
using a mix of DCF and EV/boe
methodologies. In our view, the stock
price attributes a low value to the E&P
business, where we see potential to
create value over the long term. Apart
from lower-than-expected refining and
petrochemical margins, a key risk to
our target price would be any negative
news on the issue of the KGD6 capex
audit.
􀂃 How we differ
Our FY12 and FY13 earnings forecasts
are lower than those of the Bloomberg
consensus due to differences in grossrefining-
margin (GRM) and gasoutput
assumptions.