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Reliance Industries Ltd.
FY11E on track for 26% YoY
profit rise after 2 flat years
�� 2Q FY11 profit up 28% and 1H up 30%; retain Buy
2Q FY11 profit of Reliance Industries (RIL) is up 28% YoY driven by jump in
refining and oil & gas EBIT. RIL’s 2Q refining margin is the highest in six quarters.
RIL’s 1H FY11 profit is up 30% YoY. We are keeping RIL’s FY11E EPS of Rs61,
which implies 26% YoY rise, unchanged. Thus RIL is set to report strong earnings
rise in FY11E after 2-years of flat earnings. We retain Buy on RIL.
2Q earnings growth driven by refining and oil & gas EBIT
RIL’s 2Q refining EBIT is up 63% YoY driven by 32% YoY rise in refining margin
to US$7.9/bbl. RIL’s refineries operated at 109% utilization rate in 2Q and 1H. 2Q
oil & gas EBIT is up 39% YoY driven by 55% YoY rise in volumes as KG D6 oil &
gas ramped up. 2Q and 1H petrochemical EBIT is flat YoY despite shut-down at
some plants. Petrochemical is the largest contributor to 2Q and 1H EBIT.
FY11 EPS kept unchanged; downside to FY12 EPS possible
RIL’s 2H profit would have to be 5% higher than 1H to achieve our FY11E EPS of
Rs61. We believe that is achievable despite a stronger rupee and lower refining
volumes (shut-down in 3Q) in 2H than in 1H. Refining margins have strengthened
in October 2010. RIL’s theoretical refining margin for October works out to
US$10.0-10.5/bbl vis-à-vis 1H actual margin of US$7.7/bbl. RIL also indicated
confidence that in the next few quarters refining margins may sustain or be at
higher levels than in 2Q FY11. Higher petrochemical volumes, PMT oil & gas
volumes and higher oil price may also boost 2H. RIL indicated KG D6 gas may
remain at 60mmscmd and oil at 30k b/d in most of FY12E. This may mean 4%
downside potential to our FY12E EPS (no change made).
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