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Reliance Industries
Cheap but lacking triggers
What's Changed
Rating Overweight to Equal-weight
Price Target Rs1,206.00 to Rs956.00
EPS F2012e/13e FY12e -1.2%; FY13e -5.0%
Downgrade to Equal-weight. Leaving aside
valuations, we do not see positive triggers in the
short term. We see a tangible distinction between
our view and the market’s, which seems overly
bullish, with 75% as buys. Our concerns stem from: 1)
Lack of clarity of deploying cash flows; 2) E&P remaining
a dampener; and 3) Lower petrochemical net backs.
Cash flows>Capex plans lead to uncertainty. RIL
plans to spend US$10-12bn in Petchem over 5 years,
and a similar amount in its E&P business, implying
annual capex of US$3-4 bn versus incremental cash
flows of US$7-8 bn a year. Sell down of its 30% stake in
23 E&P assets to BP could further increase cash flows
of US$7 bn in F2012 and lower future E&P spend. Core
EBITDA will also fall by ~9% due to the BP deal.
Investments in telecom and retail could fill the gap;
however, these would be longer gestation projects, and
the industry landscape is highly competitive. A buyback
plan or higher dividend payout could change our view.
E&P division still a dampener: KG D6 gas sales
volumes could average ~48.7mmscmd in F1Q12, down
2.3% QoQ and 17.6% YoY. We lower our gas production
estimates from KGD6 field to 47 mmscmd from 50
mmscmd. Further, the recent reserve update of Niko
resources (RIL’s 10% partner in KG D6) has shown a
9% downward revision to its overall reserves, which we
believe is largely related to KG-D6.
Why do we not have an Underweight? Valuations
look attractive on an absolute basis, with RIL trading at
25% discount to market as well as its historical average
on P/E basis. Global comps look cheaper with Refiners
trading at one year forward EV/EBITDA of 6.5x,
Petchem at 7.2x and E&P at 4.4x, versus RIL at 7.3x.
We have lowered our EBITDA by 4%, due to pressures
in all divisions.
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