Reliance Industries- In line 2Q; focus on promising outlook : Goldman Sachs

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Reliance Industries (RELI.BO)
Buy
In line 2Q; focus on promising outlook for refining and polyester
What's changed
Reliance Industries (RIL) reported 2QFY11 PAT of Rs49.2bn, up 28% yoy, in
line with our expectation of Rs49.1bn and Bloomberg consensus of
Rs48.8bn. Cash profit at Rs 85bn was up 29% yoy. RIL’s EBITDA at Rs94bn,
up 30% yoy, was also in line as better- than- expected petchem results
offset the weak E&P results from Panna Mukta shutdown during 2Q. While
refining margin at US$7.9/bbl was in line with our estimate of US$7.8/bbl,
the polyester chain did better than our estimates. Overall petrochemicals
EBIT margins came in higher at 14.6% vs. our estimate of 13%.
Implications
While 2Q results were as expected, the key takeaways, in our view, are the
promising outlook of middle distillate cracks and polyester margins into
2011E. We believe that the refining cycle bottomed out in 4Q2009 and
utilization rates are improving. RIL is a key beneficiary of distillate crack
recovery and a potentially widening light-heavy differential, in our view.
We believe cotton prices will remain high in coming quarters owing to
industry re-stocking after weak supplies in 2010E, lending support to
polyester margins. We believe obsession with ethylene capacities in the
Middle East has led to the street missing out on the robust outlook on the
rest of the petchem chain. In E&P, we expect further reserve accretion
from exploration. Panna Mukta has also resumed production.
Valuation
We maintain a Buy on RIL with our SOTP-based 12-m TP of Rs.1180,
potential upside of 8%. Concern over gas earnings has seen RIL trade at a
discount over the last few quarters, which will likely reverse as RIL clarifies
the next degree of gas volume ramp up in the next 2-3 quarters. We
currently assume no volume growth in FY12E in our base case.
Key risks
1) Delay in D-6 ramp-up; 2) over-paying for acquisitions; 3) risks in noncore
investments; 4) weak refining margins.