Reliance Industries - Investor e-survey: Poll Vault 2011! ::Macquarie Research,

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Reliance Industries
Investor e-survey: Poll Vault 2011!
Event
 Our 2nd independent, global investor survey: We conducted our yearly
independent poll of global investors through an e-survey to gauge perception,
stock ownership and potential triggers for RIL. Weighted analysis of the 48
responses representing US$32bn investments in India revealed that …
 Mindset shift – Neutral to positive: Investor portfolios have been materially
underweight RIL both this year as well as last. However, the mindset (stock
performance view) has shifted from neutral to positive (Fig 5). Perhaps this is
beginning to be reflected in recent stock outperformance of 6% QoQ vs the
broad market, reversing the underperformance trend of the past three years.
Impact
 Triggers may provide answer to recent outperformance – Interestingly,
investors attribute most of the triggers to upstream, which is currently onesixth
of EBIT; and a nominal 13% of the triggers to cyclical businesses, which
comprise the balance five-sixths! :
Clarity of KG-D6 production revival (29% of responses) remains the
largest trigger: Recent categorical statements by RIL and its partner, BP
Plc, toward a volume revival in two to three years may have spurred the
reversal in stock performance in the recent past.
Prospects for a hike in domestic gas prices: Four-fifths of investors do
not expect a gas price hike before March 2014, prior to expiry of the
company’s five-year contract. Investors expect a subsequent 24% price
hike (from US$ 4.2/mmBtu to US$5.21/mmbtu), which is even less than
forecast inflation (of ~40%); and also lower than the US$5.25/mmBtu
price recently approved for ONGC’s C-series block. In fact, according to
recent press reports, RIL has asked the government for international LNG
prices (of ~US$12–13/mmBtu) for its proposed CBM production.
Announcement of domestic finds (15%): A lack of ongoing drilling
suggests that this trigger is not likely to play out in the foreseeable future.
Cyclical uptick in petrochemicals and refining (13%) as a key trigger
has waned from last year (34%). Two-thirds of investors feel margins
have plateaued, with little downside risk. Perhaps RIL’s recent strong
outperformance (20–60%, Figs 17 - 18), as a defensive to global peers,
may be explained by cyclicality not being viewed as a material trigger.
 Key concerns: Besides a lack of KG ramp-up (25%), key concerns are:
The lack of strategy to deploy cash (20%) and lack of growth triggers (12%).
Unrelated diversifications (18%). The associated consensus
conglomerate discount remains unchanged from the last survey, at 15%.
Surprisingly, the CAG report (12%) stating irregularities with KG-D6, is
cited as only a modest concern.
Action and recommendation
 Compelling value – Upstream for free: We value RIL’s entire upstream
business at a nominal US$11bn. BP recently paid US$ 7.2bn for just a onethird
stake in RIL’s upstream blocks, suggesting to us that RIL’s upstream
business is available for free. Besides, a PBV of 1.3x FY12E is at the very low
end of RIL’s historical valuations.