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RIL has faced a gradual derating over the last two years due to execution lapses and
recalibration of its growth prospects. The stock has now reached levels that we believe offer a fair
risk-reward, attributing zero value to new businesses. We upgrade RIL from Hold to Buy and
maintain our earnings forecasts and Rs925 TP.
Refining, petchem, best-in-class assets
Unless there is a double dip in global growth, we do not foresee significant downside risk to our
refining and petrochemical margin estimates. We believe RIL’s assets in these segments are best
in class. Both refineries are low-cost and highly complex, while petrochemical products offer
relatively stable margins due to full integration and exposure to different margin cycles (for
cracker, aromatics, polyester), which don’t all move in the same direction.
E&P downside risk factored in
We believe that our valuation for RIL’s E&P business is now very conservative, and 46% below
the valuation implied by the BP deal – See our note, Delays in E&P, dated 26 July 2011. The key
assumption here is that the deal with BP is consummated (government has already approved),
thereby reducing exposure to E&P and deleveraging the balance sheet.
Zero expectations from new businesses
The market has viewed with concern RIL’s investments in non-core businesses like retailing,
SEZs, telecom and possibly financial services. But since these businesses are yet to contribute to
the bottom line, we believe the current stock price implies zero value for investments already
made (US$5.3bn), which is clearly an extreme view.
Value at a price
Since the rally in Indian stock markets post the election results in May 2009, RIL has
underperformed the market by 59%. There have been lapses on execution (problems in KG-D6,
relative lack of success in new E&P discoveries, slower speed in new project execution) and
recalibration of growth prospects (fewer opportunities for organic growth in core business,
choices on inorganic growth not yet working out and zero progress on entry into power segment).
We believe the current price now offers a fair risk-reward and thus we upgrade the stock from
Hold to Buy, maintaining our target price at Rs925.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RIL has faced a gradual derating over the last two years due to execution lapses and
recalibration of its growth prospects. The stock has now reached levels that we believe offer a fair
risk-reward, attributing zero value to new businesses. We upgrade RIL from Hold to Buy and
maintain our earnings forecasts and Rs925 TP.
Refining, petchem, best-in-class assets
Unless there is a double dip in global growth, we do not foresee significant downside risk to our
refining and petrochemical margin estimates. We believe RIL’s assets in these segments are best
in class. Both refineries are low-cost and highly complex, while petrochemical products offer
relatively stable margins due to full integration and exposure to different margin cycles (for
cracker, aromatics, polyester), which don’t all move in the same direction.
E&P downside risk factored in
We believe that our valuation for RIL’s E&P business is now very conservative, and 46% below
the valuation implied by the BP deal – See our note, Delays in E&P, dated 26 July 2011. The key
assumption here is that the deal with BP is consummated (government has already approved),
thereby reducing exposure to E&P and deleveraging the balance sheet.
Zero expectations from new businesses
The market has viewed with concern RIL’s investments in non-core businesses like retailing,
SEZs, telecom and possibly financial services. But since these businesses are yet to contribute to
the bottom line, we believe the current stock price implies zero value for investments already
made (US$5.3bn), which is clearly an extreme view.
Value at a price
Since the rally in Indian stock markets post the election results in May 2009, RIL has
underperformed the market by 59%. There have been lapses on execution (problems in KG-D6,
relative lack of success in new E&P discoveries, slower speed in new project execution) and
recalibration of growth prospects (fewer opportunities for organic growth in core business,
choices on inorganic growth not yet working out and zero progress on entry into power segment).
We believe the current price now offers a fair risk-reward and thus we upgrade the stock from
Hold to Buy, maintaining our target price at Rs925.
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