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India Equity Research Reports, IPO and Stock News
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The CS India strategy team’s report, Time for selective risk taking,
dated 5 September 2011, highlights that risk aversion in the Indian
market is high and that selectively taking risks now could yield
high returns.
● Amongst stocks, RIL screens high on stocks that have de-rated
despite steady earnings. On a stress-case scenario – assuming
both refining and petchem get close to bottom profitability
simultaneously, RIL could be worth Rs685/share (13% potential
downside), with refining and petchem valuations almost at half of
our base-case scenario.
● Using current multiples on FY11 delivered EBITDA, RIL would be
worth Rs826/share. Our target price of Rs1,057 (34% potential
upside) is higher as it relies on: (1) higher GRMs and (2) petchem
volume expansion (and a resultant higher near-term multiple).
● RIL’s strong cash flow and balances, and attractive valuation
should help it outperform further market weakness. While we
expect strength in refining and polymer margins to help earnings
growth, clarity on longer-term growth/returns through deployment
of its cash (reduction of leverage) could help improve its share
price performance.
Low implied valuation: Despite a large correction in regional refining
and petrochemical stock valuations, the weakness in RIL stock price
means implied valuation remains low. RIL delivered US$5.5 bn in
refining + petchem EBITDA in FY11. Using comparable multiples for
refining and petchem, we estimate the market is paying c.US$10 bn
for RIL’s E&P, shale, retail, telecoms and other businesses, which is
low. 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 upside,
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.
Clarity (and hopefully closure of) on the ongoing CAG audit could 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 (US$1/bbl increase implies 7% FY13E 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 �� ��
The CS India strategy team’s report, Time for selective risk taking,
dated 5 September 2011, highlights that risk aversion in the Indian
market is high and that selectively taking risks now could yield
high returns.
● Amongst stocks, RIL screens high on stocks that have de-rated
despite steady earnings. On a stress-case scenario – assuming
both refining and petchem get close to bottom profitability
simultaneously, RIL could be worth Rs685/share (13% potential
downside), with refining and petchem valuations almost at half of
our base-case scenario.
● Using current multiples on FY11 delivered EBITDA, RIL would be
worth Rs826/share. Our target price of Rs1,057 (34% potential
upside) is higher as it relies on: (1) higher GRMs and (2) petchem
volume expansion (and a resultant higher near-term multiple).
● RIL’s strong cash flow and balances, and attractive valuation
should help it outperform further market weakness. While we
expect strength in refining and polymer margins to help earnings
growth, clarity on longer-term growth/returns through deployment
of its cash (reduction of leverage) could help improve its share
price performance.
Low implied valuation: Despite a large correction in regional refining
and petrochemical stock valuations, the weakness in RIL stock price
means implied valuation remains low. RIL delivered US$5.5 bn in
refining + petchem EBITDA in FY11. Using comparable multiples for
refining and petchem, we estimate the market is paying c.US$10 bn
for RIL’s E&P, shale, retail, telecoms and other businesses, which is
low. 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 upside,
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.
Clarity (and hopefully closure of) on the ongoing CAG audit could 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 (US$1/bbl increase implies 7% FY13E 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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