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Reliance Industries Buy
E&P concerns priced in, reiterate Buy
RIL has fallen by 10% over the last one week. The stock has underperformed BSE Sensex by 14% over the last 3m predominantly on account of
negative newsflow on its E&P segment. RIL has also underperformed
against regional refining and petrochemical stocks.
RIL trading at a discount to regional peers, at the bottom of its 5-year
trading range
RIL is trading at 6.7x FY12e EV/EBITDA which is at the bottom end of its
last five years' trading range of 7x-24x. RIL is trading at a discount to its
regional refining peers despite being a more complex refinery. In our opinion, considering the rising Light-Heavy crude differentials and high complexity of RIL's refinery, RIL should trade at a premium to regional peers.
RIL is also trading at a 10% discount to its regional petrochemical peers.
E&P concerns factored in
We assume gas production from KGD6 at current levels of 51mmscmd in
both FY12 and FY13. Including only the value of RIL's existing producing
fields and no increase in production going ahead at KGD6, we estimate a
value of cINR150/sh for the E&P segment. This implies a valuation of
cINR900/sh for RIL, indicating that at the current market price most of the
negative impact of E&P segment is already priced in.
Media reports (Business Line, 20 June 2011) indicate that the management
committee of KG D6 block (comprising representatives of the regulator
DGH, Petroleum Ministry and contractors RIL and Niko) have in-principle
agreed to RIL's proposal to drill 3 new wells in KG D6. If true, the proposed
wells could help RIL arrest the fall in KG D6 gas production but we do not
expect these wells to commence production before FY14.
Reiterate Buy on improvement in downstream performance
With refining and petchem contributing two-thirds of its EBITDA, RIL should
benefit from improvement in downstream margins, but clarity on gas production ramp-up and capital allocation will be equally important.
With 35 discoveries in domestic blocks other than KGD6, E&P could throw
up a positive surprise for RIL, though the street is skeptical on prospects
for RIL's E&P division. As per Hardy Oil's press release, RIL started drilling
the 3rd exploration well in KGD9 block on May 10 and a positive outcome
could underline Hardy Oil's assessment of high prospectivity for the block.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries Buy
E&P concerns priced in, reiterate Buy
RIL has fallen by 10% over the last one week. The stock has underperformed BSE Sensex by 14% over the last 3m predominantly on account of
negative newsflow on its E&P segment. RIL has also underperformed
against regional refining and petrochemical stocks.
RIL trading at a discount to regional peers, at the bottom of its 5-year
trading range
RIL is trading at 6.7x FY12e EV/EBITDA which is at the bottom end of its
last five years' trading range of 7x-24x. RIL is trading at a discount to its
regional refining peers despite being a more complex refinery. In our opinion, considering the rising Light-Heavy crude differentials and high complexity of RIL's refinery, RIL should trade at a premium to regional peers.
RIL is also trading at a 10% discount to its regional petrochemical peers.
E&P concerns factored in
We assume gas production from KGD6 at current levels of 51mmscmd in
both FY12 and FY13. Including only the value of RIL's existing producing
fields and no increase in production going ahead at KGD6, we estimate a
value of cINR150/sh for the E&P segment. This implies a valuation of
cINR900/sh for RIL, indicating that at the current market price most of the
negative impact of E&P segment is already priced in.
Media reports (Business Line, 20 June 2011) indicate that the management
committee of KG D6 block (comprising representatives of the regulator
DGH, Petroleum Ministry and contractors RIL and Niko) have in-principle
agreed to RIL's proposal to drill 3 new wells in KG D6. If true, the proposed
wells could help RIL arrest the fall in KG D6 gas production but we do not
expect these wells to commence production before FY14.
Reiterate Buy on improvement in downstream performance
With refining and petchem contributing two-thirds of its EBITDA, RIL should
benefit from improvement in downstream margins, but clarity on gas production ramp-up and capital allocation will be equally important.
With 35 discoveries in domestic blocks other than KGD6, E&P could throw
up a positive surprise for RIL, though the street is skeptical on prospects
for RIL's E&P division. As per Hardy Oil's press release, RIL started drilling
the 3rd exploration well in KGD9 block on May 10 and a positive outcome
could underline Hardy Oil's assessment of high prospectivity for the block.
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