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In our July 12 Note (“Compelling valuations, de-rating unjustified”), we noted
that we were worried about cyclical stress in the event of a global economic
downturn. Unfortunately, our fears seem closer to materializing in the current
scenario. RIL stock has corrected 14% since July and now reflects refining
margins @US$6.5/bbl(vs. US$10.2YTD), 30% downside to our petchem
spreads, and a 60 mmscmd plateau for D6 gas with no further value attributed
to E&P. We maintain the asset is attractively priced; OW.
The stock is not immune to cyclical stress, risk aversion... With strong
linkages to global cyclical sectors, RIL stock and earnings are vulnerable to
a global economic slowdown and equity risk aversion.
...but reflects an ugly global scenario: RIL is currently trading at
5.2xEV/EBITDA on our earnings projections. This is below its 2008 trough.
Earnings would need to contract 32% to reflect GFC multiples. At current
prices, RIL is reflecting GRMs contracting to US$6.5/bbl (vs. RIL
GRMs@US$6.6/bbl, Sing GRMs@US$2.7/bb in FY10) and a 30%
contraction in petchem EBITDA.
Current margins are still healthy; contraction could accelerate refining
balance: Benchmark Singapore GRMs are US$7.8/bbl QTD, our forecast
builds in moderation in GRMs over FY12 (US$6/bbl for CY11). A collapse
in GRMs would accelerate shutdowns of less efficient refineries, working
out excesses in the refining system, improving refining economics for
efficient, complex refiners like RIL.
Cash – from bane to boon? With inflow of US$5.2bn on conclusion of BP
deal, RIL will have US$15bn of cash. Uncertainty on deployment of the
cash has been an overhang, but significant cash balances do give RIL dry
powder to weather a downturn, explore inorganic opportunities.
Reiterate our OW call: Potential catalysts include: 1) earnings delivery
aided by rupee depreciation, and 2) roadmap to ramp up KG production –
with fixed gas prices, E&P earnings will be stable even in a downturn. We
believe the stock is attractively priced and reiterate our OW rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In our July 12 Note (“Compelling valuations, de-rating unjustified”), we noted
that we were worried about cyclical stress in the event of a global economic
downturn. Unfortunately, our fears seem closer to materializing in the current
scenario. RIL stock has corrected 14% since July and now reflects refining
margins @US$6.5/bbl(vs. US$10.2YTD), 30% downside to our petchem
spreads, and a 60 mmscmd plateau for D6 gas with no further value attributed
to E&P. We maintain the asset is attractively priced; OW.
The stock is not immune to cyclical stress, risk aversion... With strong
linkages to global cyclical sectors, RIL stock and earnings are vulnerable to
a global economic slowdown and equity risk aversion.
...but reflects an ugly global scenario: RIL is currently trading at
5.2xEV/EBITDA on our earnings projections. This is below its 2008 trough.
Earnings would need to contract 32% to reflect GFC multiples. At current
prices, RIL is reflecting GRMs contracting to US$6.5/bbl (vs. RIL
GRMs@US$6.6/bbl, Sing GRMs@US$2.7/bb in FY10) and a 30%
contraction in petchem EBITDA.
Current margins are still healthy; contraction could accelerate refining
balance: Benchmark Singapore GRMs are US$7.8/bbl QTD, our forecast
builds in moderation in GRMs over FY12 (US$6/bbl for CY11). A collapse
in GRMs would accelerate shutdowns of less efficient refineries, working
out excesses in the refining system, improving refining economics for
efficient, complex refiners like RIL.
Cash – from bane to boon? With inflow of US$5.2bn on conclusion of BP
deal, RIL will have US$15bn of cash. Uncertainty on deployment of the
cash has been an overhang, but significant cash balances do give RIL dry
powder to weather a downturn, explore inorganic opportunities.
Reiterate our OW call: Potential catalysts include: 1) earnings delivery
aided by rupee depreciation, and 2) roadmap to ramp up KG production –
with fixed gas prices, E&P earnings will be stable even in a downturn. We
believe the stock is attractively priced and reiterate our OW rating.
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