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UBS Investment Research
Reliance Industries
D ecision on deal approval looks closer
Event: The oil ministry recommends granting approval to RIL-BP JV
Media reports suggest that the BP RIL deal has now received approval from the
home (for security reasons) and oil ministry and the CCEA will consider the deal
next week.
Impact: Marginal impact on valuation/earnings; positive for sentiment
Valuation: The stake sale has an offsetting effect on our valuation - while the sale
of 30% stake in the upstream business lowers the valuation by ~Rs 109/sh; the
US$7.2bn of incoming cash will offset that by adding Rs 100/sh to the valuation.
Earnings: The impact on earnings is also only marginally negative if one assumes a
return of ~9% on the incoming cash post the deal. However, quality of earnings
will be lower.
Action: Company’s earnings will get further exposed to refining/petchem
The stake sale combined with the decrease in gas volumes has led refining and
petchem to constitute a higher proportion of Reliance’s earnings than the street
estimated about a year ago. For instance, refining/petchem contribution in 4QFY11
would have been only 13% had RIL’s share in the business been 60% vs 90% then.
The approval to the JV will be a sentiment positive as BP’s deepwater expertise
will help manage the reservoirs better going forward, though any increase in actual
volumes will take at least two-three years. We reiterate our Buy rating on the stock.
Valuation: Maintain Buy and SOTP based PT of Rs 1,170/share
We value the petrochem/refining business at 7xFY13e EBIDTA and upstream on
NPV. At 5.8x FY13e EV/EBIDTA and 10.6x 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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