Reliance Industries- Compelling valuations, we think de-rating unjustified ::JPMorgan

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Reliance Industries Ltd Overweight
RELI.BO, RIL IN
Compelling valuations, we think de-rating unjustified


RIL has de-rated over the last 3-4 months on 1) low visibility on growth, use
of cash and 2) regulatory concerns. Shale gas, petchem and India-centric
service sector investments provide growth visibility and value optionality, in
our view, and we think regulatory concerns are overdone. Our new SOTP
based PT of Rs1200 offers 41% potential upside from current levels.
 Regulatory risk overplayed: We expect the domestic E&P business,
around which regulatory concerns are centred, to contribute only 19%/22%
of EBITDA in FY12/13. Furthermore, given successive governments’
support for NELP, and that it was set up to incentivize private sector
investments in India E&P, we see limited negative fall out. Refining,
petchem, new business initiatives do not have regulatory overhang.
 Shale gas starting to kick in, provides volume growth visibility: We
forecast shale gas volumes from RIL’s JVs will be 99/180/241Bcf over
FY12/13/14, and we sync our numbers with our US analysts’ forecasts
(J.Allman: Pioneer, Carrizo JVs, K.M.Lucas: Chevron). We expect shale
gas to add 3-8% to RIL’s earnings over FY12-14, in our view validating the
strategy RIL is putting in place for future growth.
 Petchem, India-centric services provide next leg of growth: RIL is
investing US$19bn over FY12-15 in petchem, broadband wireless, retail
and financial services. Bulk of investment is in core petchem, driving
expansion in CY14. Utilization of resources in under-penetrated sectors in
India has been core to RIL’s past growth. RIL is containing risks through
strategic partnerships, lower exposure (32% of cash/cashflows into non-core
initiatives) even as it pursues growth options. Historically, periods of new
business incubation have provided a good entry opportunity to the stock.
New Mar-12 SOTP of Rs1200, 41% potential upside. Our SOTP captures
value of RIL's B/S investments not yet contributing to earnings. Even
ignoring value of new domestic E&P due to regulatory clouds, we estimate
core petchem, refining business and value on B/S provides 18% upside to
current stock price. Risks emanate from cyclical slowdown, harsh regulatory
action.