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Valuations have corrected materially: Despite a large correction in
regional refining and petrochemical stock valuations, the weakness in RIL
share prices means implied valuations remain low. RIL delivered $5.5 bn in
refining + petchem EBITDA in FY11. Asian comparables now trade at 6.3-
6.7x CY11 estimates (higher on 2010 delivered). Using these multiples for
RIL’s FY11E EBITDA, adding net cash estimates and valuation of the
treasury stock, yields Rs685/sh (15% downside). Our DCF based valuation
of RIL’s refining / petchem is higher, reflecting 1) lower upfront taxes, 2)
GRM expansion expectations, and 3) petchem volume growth.
■ Implied E&P valuation well below BP deal: Using comparable multiples
for refining and petchem, we estimate the market is paying c.$10 bn for RIL’s
E&P, shale, retail, telecom and other businesses, which is low. BP has
agreed to pay $7.2 bn for a 30% stake in RIL’s E&P. Even after the sale, RIL
will have a c.60% residual stake in the acreage. The book value of other
assets is c.US$5 bn. It is probably too early to suggest BP has overpaid (BP
has likely done significant due diligence). We think BP has paid for longer
term resource upsides, with the hope of ‘fixing’ output at D6. A closure of the
E&P ‘valuation gap’ needs clarity on gas volume and exploration outlook
from either RIL or BP.
■ Catalysts: Clarity (and hopefully closure of) on the ongoing CAG audit can
help RIL stock. Refining margins should continue to improve – yet low
balance sheet leverage and large other businesses mean RIL has lower
leverage to GRMs ($1/bbl increase implies 7% FY13 EPS improvement).
With RIL now ruling out near-term D6 volume growth, use of large cash/cash
flow remains the one potentially large catalyst – which is unfortunately
difficult to predict. We maintain our OUTPERFORM rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Valuations have corrected materially: Despite a large correction in
regional refining and petrochemical stock valuations, the weakness in RIL
share prices means implied valuations remain low. RIL delivered $5.5 bn in
refining + petchem EBITDA in FY11. Asian comparables now trade at 6.3-
6.7x CY11 estimates (higher on 2010 delivered). Using these multiples for
RIL’s FY11E EBITDA, adding net cash estimates and valuation of the
treasury stock, yields Rs685/sh (15% downside). Our DCF based valuation
of RIL’s refining / petchem is higher, reflecting 1) lower upfront taxes, 2)
GRM expansion expectations, and 3) petchem volume growth.
■ Implied E&P valuation well below BP deal: Using comparable multiples
for refining and petchem, we estimate the market is paying c.$10 bn for RIL’s
E&P, shale, retail, telecom and other businesses, which is low. BP has
agreed to pay $7.2 bn for a 30% stake in RIL’s E&P. Even after the sale, RIL
will have a c.60% residual stake in the acreage. The book value of other
assets is c.US$5 bn. It is probably too early to suggest BP has overpaid (BP
has likely done significant due diligence). We think BP has paid for longer
term resource upsides, with the hope of ‘fixing’ output at D6. A closure of the
E&P ‘valuation gap’ needs clarity on gas volume and exploration outlook
from either RIL or BP.
■ Catalysts: Clarity (and hopefully closure of) on the ongoing CAG audit can
help RIL stock. Refining margins should continue to improve – yet low
balance sheet leverage and large other businesses mean RIL has lower
leverage to GRMs ($1/bbl increase implies 7% FY13 EPS improvement).
With RIL now ruling out near-term D6 volume growth, use of large cash/cash
flow remains the one potentially large catalyst – which is unfortunately
difficult to predict. We maintain our OUTPERFORM rating on the stock.
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