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UBS Investment Research
Reliance Industries
A ssessing a bear case for Reliance
Event: Continued underperformance of RIL stock on negative news flow
Reliance Industries has underperformed the Sensex by 11% over the past 3 months.
This is mainly on negative news flow based on media reports that suggest that the
upstream cos. received undue favours from the ministry and the DGH(Directorate
General of Hydrocarbons).
Impact: Our bear case valuation for the stock is Rs 755/share
Our bear case valuation of Rs 755/sh assumes: 1) all four quarters of FY13 will be
as bad as the worst quarter in the last 20 quarters for both the petchem and the
refining business and 2) 45mmscmd peak production from KG-D6. The
exploration upside contributes Rs 100/sh in this scenario and mainly reflects value
of the Mahanadi, Cauvery and KG (ex KG-D6) basins. The bear case stock price of
Rs 755/sh implies a PE multiple of 9.4x when applied to our base case FY13 EPSe
of Rs 80.45/sh. 9.4x PE is towards the lower end of the stock’s trading band.
Action: Buy – Very attractive risk-reward at current valuations
Currently the stock provides for a very attractive risk-reward play. The upside from
current levels to our target valuation is ~38%, compared to this, the downside to
the bear case valuation is only 11%. We expect refining and petchem margins to
start improving in 4QCY2011.
Valuation: Maintain Buy and SOTP based PT of Rs 1,170/sh
We value the petrochem/refining business at 7xFY13e EBIDTA, the producing
fields on NPV and exploration option using a multiple based approach. At 5.8x
FY13e EV/EBIDTA and 10.5x FY13e EPS stock looks attractive.
Reliance Industries
Reliance Industries (RIL) is the largest integrated oil and gas company in India.
Its three main businesses are exploration & production, refining and
petrochemicals. Its two refineries in Jamnagar, Gujarat have among the highest
complexity globally and a combined capacity of 1mbpd. The company's FY10
turnover was US$46bn. It derives more than 50% of its revenue from exports.
Statement of Risk
We believe gas volumes from KG-D6 are key drivers of the stock’s performance.
Refining and petrochemical margins are also major drivers of the company’s
earnings.
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