BUY Reliance Industries- Reducing valuation on E&P concerns, but cheap valuation::Deutsche bank,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Reliance Industries
Reuters: RELI.BO Bloomberg: RIL IN Exchange: BSE Ticker: RELI
Reducing valuation on E&P
concerns, maintaining Buy


Reiterate Buy on valuation support and robust downstream margins
We reiterate Buy on RIL and believe that robust downstream margins and the RILBP deal provide downside support for the stock. We have reduced our valuation
by 8% to INR1060/sh on account of delays in receiving approvals in E&P and the
reserves downgrade by Niko Resources. RIL is trading at 6.7x FY12E EV/EBITDA,
at the bottom end of its past five years' trading range and at a discount to regional
peers. We estimate RIL's stress case valuation at INR885/sh, indicating that most
of the negatives in the E&P segment are already priced in.


Raising earnings on refining, cutting valuation on E&P
We have increased our FY12/13 GRM estimate by 11%/ 2% to US$10.5/10.75 per
bbl, in line with an expectation of higher regional margins. We have cut our
FY12/13 KGD6 gas volume forecast 6% to 48mmscmd and expect gas production
to now start increasing only from FY15, due to delays in the approval for drilling of
additional wells in the block. We have now reduced the value of the E&P business
by 29% to INR250/sh on account of the delays in  approvals and the reserves
downgrade by Niko Resources. These changes lead to an increase of 2%/1% in
FY12/13 EPS to INR75.0/85.1 and an 8% reduction in valuation to INR1060/sh.
RIL trading at historically inexpensive valuations
On FY12E, RIL is trading at 6.7x EV/EBITDA, 11.6x P/E and 1.7x P/BV – all of which
are at the bottom end of its past five years' trading range and at a discount to
regional peers. Valuing only  the producing blocks, and assuming a lower FY12E
EV/EBITDA of 6.5x for refining and petrochemicals, we arrive at a stress case
value of INR885/sh. We expect BP’s deepwater expertise to help RIL tackle the
challenges in KGD6 as well as aid in accelerating the exploration programme.
SOTP-based target price of INR1060; worsening global economy the key risk
Our SOTP-based target price of INR1060 uses 7.2x FY12E EV/EBITDA for refining
and petrochemicals and DCF (WACC 10.9%) for KGD6 and exploration upside
potential. Risks are 1) a worsening global economy that could hurt refining and
petrochemicals demand; 2) production outages; and 3) policy vagaries.