Reliance Industries - Clawing back :: Macquarie Research,

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Reliance Industries
Clawing back
Event
 RIL reported a PAT of Rs56.6bn for 1Q FY11, a modest growth of 17% YoY,
which is exactly in line with expectations. A 43% YoY rise in GRM was the key
driver. Despite a 4-5% dip in domestic demand, higher exports enabled an 8%
rise in petrochemical margins, while an 18% dip in gas volumes resulted in a
23% fall in upstream profits. RIL's US shale gas production is in the process
of starting-up. We re-affirm our Outperform with a TP of Rs 1083.
Impact
 57% rise in refining EBIT and record utilisation. RIL’s GRM rose to US$
10.3/bbl, but premium over Singapore complex narrowed YoY from
US$3.4/bbl to US$1.8/bbl, primarily due to stoppage of cheap KGD6 gas for
internal consumption. RIL comfortably achieved 110% refinery utilization.
 Petrochem EBIT rises 8% despite a 4-5% dip in domestic demand.
Inventory de-stocking due to a price decline is temporary. July 2011 has
witnessed signs of a demand pick-up. While global cotton prices have
collapsed 12% QoQ, the delta between cotton and polyester remains very
high. Polymer stream margins are poised for a recovery as a nominal 2% pa
capacity increase follows a record 8% rise last year.
 KGD6 output fell to 49mmscmd, an 18% YoY dip. This precipitated a 23%
fall in upstream EBIT. RIL has commenced upstream work with BP, even prior
to government approval. The 2 blocks that were not approved by the
government shall reduce BP's acquisition price of US$ 7.2bn. Delayed
government approvals for declaring commerciality in R1 region of KGD6 and
NEC 25 has delayed further ramp-up.
 Clawing back growth: RIL's shale JV production in US has commenced.
RIL's Eagle Ford shale JV is primary focus for ramp-up due to high liquids
content. JV production with Carizzo in Marcellus shall also commence from
next quarter. RIL is also in the process of negotiating technology for its
petrochemical gas cracker. Petrochemical projects costing ~ US$10bn shall
commence production starting 18 months from now. Polyester capacity is
poised to double from 6.5m tpa to 14m tpa over 42 months. Given its strong
balance sheet (US$10bn cash, net gearing of 14%, plus US$7.2bn to be
received from BP) and sizeable cash flows of US$6-7bn pa, the company is in
the process of formalizing plans for even stronger growth.
Earnings and target price revision
 FY13E PAT cut by 2% due to lowered oil production estimates from KGD6.
TP adjusted downwards to Rs1083 (from Rs1084 previously).
Price catalyst
 12-month price target: Rs1,083.00 based on a Sum of Parts methodology.
 Catalyst: Clarity on KGD6 drilling plans, CAG report
Action and recommendation
 While uncertainty on upstream may continue in the near-term, current
valuations make a strong case for accumulating RIL at opportune times as a
storehouse of long-term value and a play on the cyclical upturn in progress.