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Reliance Industries (RIL)
Energy
Weakness is not always bad. We see RIL as a beneficiary of the recent weakness in
the Rupee which will help it sustain earnings despite weakness in refining and chemical
margins. We believe the recent correction in RIL’s stock price offers a good entry point
to accumulate the stock given a favorable risk-reward balance. We have revised our
earnings estimates for RIL to reflect a weaker Rupee (+ve) and lower refining and
chemical margins (-ve). We maintain our BUY rating on RIL stock given (1) the stock is
trading at inexpensive 9.3X FY2013E EPS and (2) it offers potential upside of 30% to
our revised SOTP-based target price of `925 (`1,000 previously).
Weakening of Rupee is positive for earnings
We expect RIL’s earnings to benefit significantly from the recent sharp weakening of the Indian
Rupee against the US dollar. We note that the Rupee has depreciated by 16% against the US
dollar over the past four months. RIL benefits from a weakening of the Rupee across all its
segments. We note that the domestic selling prices of its products and purchase price of raw
materials are linked to landed cost of imports; it gets export price in case of exports of products
(refined products primarily). We highlight that a `1/US$ depreciation in Rupee increases RIL’s
earnings by ~3% for FY2012-14E. The weakening of the Rupee will offset the recent weakness in
refining and chemical margins. We discuss the same in detail later in the note.
Cut target price to reflect conservative assumptions
We have revised our SOTP-based fair value for RIL stock to `925 from `1,000 previously to reflect
(1) lower margins and multiples for refining and petrochemical segments given the looming
economic slowdown in Europe and US, (2) lower oil and gas recovery from KG D-6 block given the
persistent decline in production and (3) nil value to KG D-3 and KG D-9 blocks given the lack of
clarity on commercialization of reserves. We would revisit our stance on the E&P business once the
management provides some clarity with respect to (1) production profile for KG D-6 block and
(2) development plans for other prospective blocks.
Revised earnings to reflect weaker Rupee and lower margins
We have revised our EPS estimates for RIL to `70 for FY2012E, `76 for FY2013E and `77 for
FY2014E from `70, `74 and `75 previously, to reflect (1) weaker Rupee assumptions (+ve impact),
(2) lower petrochemical and refining margins (-ve impact) and (3) other minor changes. Key
downside risks to our earnings estimates stem from (1) weaker-than-expected petrochemical and
refining margins and (2) further decline in gas production from KG D-6 block.
Valuation—12-month target price at `925
We have reduced our SOTP-based target price for RIL stock to `925 from `1,000 previously.
The downward revision in fair value reflects (1) lower margins and multiples for refining and
petrochemical segments and (2) lower recovery of oil and gas from KG D-6 block. Exhibit 9
presents our SOTP-based fair valuation based on FY2013E estimates. We discuss the
valuation for each segment in detail below.
Refining segment. We value RIL’s refining segment at `299/share based on 5X FY2013E
EBITDA. We estimate refining segment EBITDA of `178 bn in FY2013E based on midcycle
refining margins of US$9.7/bbl.
Petrochemical segment. We value RIL’s petrochemical segment at `207/share based on
5X FY2013E EBITDA. We estimate petrochemical segment EBITDA of `123 bn in FY2013E
based on lower petchem margins versus FY2012E levels.
Upstream segment. We value RIL’s upstream segment at `179/share based on DCF for
the key blocks. We note that KG D-6 block contributes `120/share based on 7.1 tcf of
recoverable reserves (RIL’s share) and NEC-25 block contributes `15/share based on 1.1
tcf of recoverable reserves (RIL’s share). We see downside risks to our valuation of
developing blocks given the delays in the exploration activities.
Investments, loans and advances and other businesses. We value retail and SEZ
businesses at `23/share based on 0.8X book value. Other investments, loans and
advances and capital WIP contribute `143/share at 1X book value.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RIL)
Energy
Weakness is not always bad. We see RIL as a beneficiary of the recent weakness in
the Rupee which will help it sustain earnings despite weakness in refining and chemical
margins. We believe the recent correction in RIL’s stock price offers a good entry point
to accumulate the stock given a favorable risk-reward balance. We have revised our
earnings estimates for RIL to reflect a weaker Rupee (+ve) and lower refining and
chemical margins (-ve). We maintain our BUY rating on RIL stock given (1) the stock is
trading at inexpensive 9.3X FY2013E EPS and (2) it offers potential upside of 30% to
our revised SOTP-based target price of `925 (`1,000 previously).
Weakening of Rupee is positive for earnings
We expect RIL’s earnings to benefit significantly from the recent sharp weakening of the Indian
Rupee against the US dollar. We note that the Rupee has depreciated by 16% against the US
dollar over the past four months. RIL benefits from a weakening of the Rupee across all its
segments. We note that the domestic selling prices of its products and purchase price of raw
materials are linked to landed cost of imports; it gets export price in case of exports of products
(refined products primarily). We highlight that a `1/US$ depreciation in Rupee increases RIL’s
earnings by ~3% for FY2012-14E. The weakening of the Rupee will offset the recent weakness in
refining and chemical margins. We discuss the same in detail later in the note.
Cut target price to reflect conservative assumptions
We have revised our SOTP-based fair value for RIL stock to `925 from `1,000 previously to reflect
(1) lower margins and multiples for refining and petrochemical segments given the looming
economic slowdown in Europe and US, (2) lower oil and gas recovery from KG D-6 block given the
persistent decline in production and (3) nil value to KG D-3 and KG D-9 blocks given the lack of
clarity on commercialization of reserves. We would revisit our stance on the E&P business once the
management provides some clarity with respect to (1) production profile for KG D-6 block and
(2) development plans for other prospective blocks.
Revised earnings to reflect weaker Rupee and lower margins
We have revised our EPS estimates for RIL to `70 for FY2012E, `76 for FY2013E and `77 for
FY2014E from `70, `74 and `75 previously, to reflect (1) weaker Rupee assumptions (+ve impact),
(2) lower petrochemical and refining margins (-ve impact) and (3) other minor changes. Key
downside risks to our earnings estimates stem from (1) weaker-than-expected petrochemical and
refining margins and (2) further decline in gas production from KG D-6 block.
Valuation—12-month target price at `925
We have reduced our SOTP-based target price for RIL stock to `925 from `1,000 previously.
The downward revision in fair value reflects (1) lower margins and multiples for refining and
petrochemical segments and (2) lower recovery of oil and gas from KG D-6 block. Exhibit 9
presents our SOTP-based fair valuation based on FY2013E estimates. We discuss the
valuation for each segment in detail below.
Refining segment. We value RIL’s refining segment at `299/share based on 5X FY2013E
EBITDA. We estimate refining segment EBITDA of `178 bn in FY2013E based on midcycle
refining margins of US$9.7/bbl.
Petrochemical segment. We value RIL’s petrochemical segment at `207/share based on
5X FY2013E EBITDA. We estimate petrochemical segment EBITDA of `123 bn in FY2013E
based on lower petchem margins versus FY2012E levels.
Upstream segment. We value RIL’s upstream segment at `179/share based on DCF for
the key blocks. We note that KG D-6 block contributes `120/share based on 7.1 tcf of
recoverable reserves (RIL’s share) and NEC-25 block contributes `15/share based on 1.1
tcf of recoverable reserves (RIL’s share). We see downside risks to our valuation of
developing blocks given the delays in the exploration activities.
Investments, loans and advances and other businesses. We value retail and SEZ
businesses at `23/share based on 0.8X book value. Other investments, loans and
advances and capital WIP contribute `143/share at 1X book value.
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