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Reliance Industries Ltd.
Modest cut in EPS and PO on
petrochemical margin changes
„Cut FY12-13 EPS and PO by 1-2% on margin changes; Buy
We have raised our FY12-FY13 margin projections for Reliance Industries (RIL)
petrochemical products like MEG and butadiene, but have cut PTA margins. The
net impact is a reduction in our FY12-FY13 EPS estimates of 1-2% and drop in
our PO of 1%, to Rs1,071. Despite the strength in the polyester chain and refining
margins, RIL has underperformed due to problems in its E&P business. RIL’s PO
implies 20% potential upside. Even its fair value factoring in the worst-case E&P
value implies 14% potential upside. We retain our Buy rating on RIL.
Stock performance hit by E&P de-rating
RIL has underperformed the BSE-30 by 77% since April 2009. RIL has also
underperformed Asia Pac refining and petrochemical peers since August 2010. Its
Asia Pac peers are up 21-142%, while RIL is down 11% in this period. RIL’s E&P
business has been de-rated due to problems with the KG D6 gas ramp-up. 2P
reserves in KG D6 have also been cut by 21% due to technical revisions. This cut is
as per independent expert-evaluated estimates published recently by RIL’s partner
in KG D6, Niko Resources. The de-rating of E&P, which was once over-valued, has
neutralized the gains from the strength in refining and polyester chain margins.
Even fair value factoring worst case E&P implies 14% upside
RIL's fair value factoring in the worst-case E&P valuation (Rs162/share) is
Rs1,022/share. Even that valuation implies 14% potential upside. We have valued
RIL’s refining and petrochemical business on DCF basis. Refining EV implies
EV/EBITDA of 8.3x and petrochemical EV implies EV/EBITDA of 7.0x on FY12
EBITDA. Asia Pac deregulated refiners’ average EV/EBITDA is 8.2x, while
petrochemical players’ average EV/EBITDA is 10.5x.
Price objective basis & risk
Reliance Inds (XRELF / RLNIY)
Our PO of Rs1,071 (GDR US$45.26) is based on a sum-of-the-parts valuation.
The value of the refining and petrochemical business and oil and gas reserves
and resources is calculated on DCF basis, using a WACC of 11.8pct. Refining
and marketing (Rs437) is 41pct of our PO, E&P valuation (Rs211) 20pct and
petrochemicals (Rs409) 39pct. Downside risks are (1) 7-year income tax holiday
being disallowed on gas production, which would mean lower cash flow, profit
and fair value, (2) Lower-than-expected oil price, (3) Huge disappointments on
the E&P front and (4) refining and petrochemical margins being lower than
expected, (5) Large acquisitions, which are value dilutive. Upside risks are
(1) Refining and petrochemical margins being better than expected, (2) Higherthan-expected oil price, (3) Higher-than-expected reserve accretion in the next
12-24 months and (4) Large acquisitions that increase fair value significantly
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries Ltd.
Modest cut in EPS and PO on
petrochemical margin changes
„Cut FY12-13 EPS and PO by 1-2% on margin changes; Buy
We have raised our FY12-FY13 margin projections for Reliance Industries (RIL)
petrochemical products like MEG and butadiene, but have cut PTA margins. The
net impact is a reduction in our FY12-FY13 EPS estimates of 1-2% and drop in
our PO of 1%, to Rs1,071. Despite the strength in the polyester chain and refining
margins, RIL has underperformed due to problems in its E&P business. RIL’s PO
implies 20% potential upside. Even its fair value factoring in the worst-case E&P
value implies 14% potential upside. We retain our Buy rating on RIL.
Stock performance hit by E&P de-rating
RIL has underperformed the BSE-30 by 77% since April 2009. RIL has also
underperformed Asia Pac refining and petrochemical peers since August 2010. Its
Asia Pac peers are up 21-142%, while RIL is down 11% in this period. RIL’s E&P
business has been de-rated due to problems with the KG D6 gas ramp-up. 2P
reserves in KG D6 have also been cut by 21% due to technical revisions. This cut is
as per independent expert-evaluated estimates published recently by RIL’s partner
in KG D6, Niko Resources. The de-rating of E&P, which was once over-valued, has
neutralized the gains from the strength in refining and polyester chain margins.
RIL's fair value factoring in the worst-case E&P valuation (Rs162/share) is
Rs1,022/share. Even that valuation implies 14% potential upside. We have valued
RIL’s refining and petrochemical business on DCF basis. Refining EV implies
EV/EBITDA of 8.3x and petrochemical EV implies EV/EBITDA of 7.0x on FY12
EBITDA. Asia Pac deregulated refiners’ average EV/EBITDA is 8.2x, while
petrochemical players’ average EV/EBITDA is 10.5x.
Price objective basis & risk
Reliance Inds (XRELF / RLNIY)
Our PO of Rs1,071 (GDR US$45.26) is based on a sum-of-the-parts valuation.
The value of the refining and petrochemical business and oil and gas reserves
and resources is calculated on DCF basis, using a WACC of 11.8pct. Refining
and marketing (Rs437) is 41pct of our PO, E&P valuation (Rs211) 20pct and
petrochemicals (Rs409) 39pct. Downside risks are (1) 7-year income tax holiday
being disallowed on gas production, which would mean lower cash flow, profit
and fair value, (2) Lower-than-expected oil price, (3) Huge disappointments on
the E&P front and (4) refining and petrochemical margins being lower than
expected, (5) Large acquisitions, which are value dilutive. Upside risks are
(1) Refining and petrochemical margins being better than expected, (2) Higherthan-expected oil price, (3) Higher-than-expected reserve accretion in the next
12-24 months and (4) Large acquisitions that increase fair value significantly
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