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Reliance Industries (RIL)
Energy
Dry well. The final CAG report on performance audit of hydrocarbon PSCs tabled in
the Parliament is similar to the draft report released in June 2011 and may not have a
material impact on RIL. In our view, RIL’s stock price largely factors in concerns
pertaining to the E&P segment and we retain our positive stance despite the 13% runup
in the stock price in the past 10 days. Our 12-month SOTP-based fair valuation is
`1,045 and trough-case valuation `890. Key risk stems from weaker-than-expected
global economic conditions.
Concerns relate to technical and procedural issues and highlights lapses by DGH and MOPNG
The CAG audit revealed several technical and procedural lapses, which were ‘approved’ by the
DGH and MOPNG contrary to PSC provisions. (1) RIL was allowed to retain the entire block area of
7,645 sq. km at the end of Phase I in June 2004 and Phase II in June 2005 contrary to the PSC
provision of phased relinquishment of areas (25% after each phase). The operator also received
approval from MOPNG to treat the entire contract area as a ‘discovery area’ in February 2009.
(2) RIL initiated activities pertaining to a revised field development plan even before the DGH’s
approval of the addendum to the initial development plan (AIDP).
Difficult to prove reasonableness of costs incurred in large procurement contracts
The CAG audit has also raised concerns on the award of 10 large procurement contracts in
FY2007-08 on single financial bids including eight contracts awarded to Aker Group by RIL.
However, the auditor could not establish the reasonableness of (1) costs incurred and (2) major
revisions in scope, quantities, and specifications, which may have adverse implications for cost
recovery and government’s share of profit petroleum. We note that CAG has sought an in-depth
review of these contracts.
No material impact on RIL unless unfair escalation of capex is proved
We do not see any material implications on RIL from the technical and procedural lapses, given
that key activities were executed either in consultation with or the approval of DGH and MOPNG.
We see a material impact on RIL, only if unfair cost-inflation of capex on KG D-6 block, is proved.
However, this is unlikely to be the case and would be difficult to establish, in our view.
Stock still below our trough-case valuation; maintain BUY rating
We maintain our BUY rating on the stock with an SOTP-based target price of `1,045 based on
FY2013E estimates. We compute a trough-case value of RIL at `890 (see Exhibit 1), assuming
(1) lower multiples for refining and petrochemical segments at 5.5X FY2013E EBITDA, (2) peak
production of KG D-6 block at 50 mcm/d, (3) no tax exemption on gas production from KG D-6
block and (4) nil value from the upstream blocks under development/appraisal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Reliance Industries (RIL)
Energy
Dry well. The final CAG report on performance audit of hydrocarbon PSCs tabled in
the Parliament is similar to the draft report released in June 2011 and may not have a
material impact on RIL. In our view, RIL’s stock price largely factors in concerns
pertaining to the E&P segment and we retain our positive stance despite the 13% runup
in the stock price in the past 10 days. Our 12-month SOTP-based fair valuation is
`1,045 and trough-case valuation `890. Key risk stems from weaker-than-expected
global economic conditions.
Concerns relate to technical and procedural issues and highlights lapses by DGH and MOPNG
The CAG audit revealed several technical and procedural lapses, which were ‘approved’ by the
DGH and MOPNG contrary to PSC provisions. (1) RIL was allowed to retain the entire block area of
7,645 sq. km at the end of Phase I in June 2004 and Phase II in June 2005 contrary to the PSC
provision of phased relinquishment of areas (25% after each phase). The operator also received
approval from MOPNG to treat the entire contract area as a ‘discovery area’ in February 2009.
(2) RIL initiated activities pertaining to a revised field development plan even before the DGH’s
approval of the addendum to the initial development plan (AIDP).
Difficult to prove reasonableness of costs incurred in large procurement contracts
The CAG audit has also raised concerns on the award of 10 large procurement contracts in
FY2007-08 on single financial bids including eight contracts awarded to Aker Group by RIL.
However, the auditor could not establish the reasonableness of (1) costs incurred and (2) major
revisions in scope, quantities, and specifications, which may have adverse implications for cost
recovery and government’s share of profit petroleum. We note that CAG has sought an in-depth
review of these contracts.
No material impact on RIL unless unfair escalation of capex is proved
We do not see any material implications on RIL from the technical and procedural lapses, given
that key activities were executed either in consultation with or the approval of DGH and MOPNG.
We see a material impact on RIL, only if unfair cost-inflation of capex on KG D-6 block, is proved.
However, this is unlikely to be the case and would be difficult to establish, in our view.
Stock still below our trough-case valuation; maintain BUY rating
We maintain our BUY rating on the stock with an SOTP-based target price of `1,045 based on
FY2013E estimates. We compute a trough-case value of RIL at `890 (see Exhibit 1), assuming
(1) lower multiples for refining and petrochemical segments at 5.5X FY2013E EBITDA, (2) peak
production of KG D-6 block at 50 mcm/d, (3) no tax exemption on gas production from KG D-6
block and (4) nil value from the upstream blocks under development/appraisal.
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