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RIL’s current valuation corresponds to (1) distress
GRMs (US$7.5), (2) bear case value of D6/known
reserves, (3) no exploration premium and (4) cash +
other investments valued at ~20% discount.
Combining distress valuations on E&P/refining with 50%
discount on cash, yields worst case SOTP of Rs679.
Fear of value destruction in cash seems exaggerated;
maintain OP with target of Rs969 (Rs1,050 earlier).
We cut FY12-14E EPS by 5-8% on lower oil/gas
production and lower GRMs; refining/petchem valued at
6.5x EBITDA to factor in risks of a global slowdown.
Valuation below worst case refining/E&P value. We
estimate an SOTP of Rs811 based on (1) GRM of US$7.5
(median during 2009-10), (2) bear case D6 value of
Rs113/sh at 8tcf recovery and (3) no exploration premium
for other discovered/un-discovered assets (D3, D9, KG-D4,
MN-D4, CY-D5). Current valuations therefore seem to imply
“value destruction” in cash and other investments.
What about the cash, though? We believe the market is
now factoring in ~20% discount on the cash on books, in
addition to the distressed values of E&P/refining as above.
RIL has a problem of plenty; we estimate cash balance
>US$11bn on Mar-12E post the completion of the BP deal.
The recent investments have been small and in diversified
sectors (telecom, financial services, hotels), raising fears of
either lack of investment options and/or sub-par returns on
its diversifications. If everything than can go wrong does,
then at 50% discount to cash + other investments, and
distress valuation for refining/petchem – the worst-case
SOTP works out to Rs679.
However, re-investment concerns overstated now.
Current valuations reflect a very pessimistic view on the
“value destruction” from investments & cash on the books.
At current levels, the stock is already factoring in ~20-25%
discount to cash balance, thus offering a favourable riskreward. Maintain OP with a price target of Rs969.
Earnings adjusted down for macro risks and E&P rampup. We cut FY12-14E earnings by 5-8% on (1) marginally
lower GRMs of US$10.0/10.3/10.5 for FY12-14E vs.
US$10/10.5/11.0, (2) lower oil/gas production from D6 over
FY12-14E (49/51/55 vs. 51/55/60mmscmd) and (3) lower
petchem margins to reflect emerging macro risks.
Base case:
Our revised base case price target for RIL is now Rs969 vs. Rs1,050 earlier. This is a result of
earnings revision as well as lowering of the valuation multiple for the refining and petrochemical
business, given the evolving risks of a global slowdown.
We cut FY12/13/14E earnings by 5-8% to factor in the following changes:
1. Even as we have maintained our FY12 refining margin assumptions at US$10/bbl (1Q FY12
at US$10.3/bbl and 2Q Singapore refining margins at 1Q levels of US$8.5/bbl), we have
marginally reduced FY13/14E GRMs to US$10.3/10.5/bbl vs US$10.5/11.0/bbl earlier.
2. We have moderated KG gas volumes to 49/51/55mmscmd for FY12/13/14E vs
51/55/60mmscmd assumed earlier. We have also cut oil production at MA to current levels
of 15kbpd for FY12/13/14 vs19/25/25kbpd earlier.
3. We have also lowered petchem and polyester spreads to reflect 1Q weak spreads and
potential slowdown in demand.
4. Higher tax rate
We now value the refining and petchem business at EV/EBITDA of 6.5x FY13E vs. 7.0x earlier,
to factor in headwinds facing the global demand scenario.
In order to get a sense of what’s factored in at the current stock levels and the resultant riskreward, we have modelled three scenarios factoring in different refining margins and E&P values
and back calculating to assess what the current market price seems to be factoring in.
Scenario 1 – Stripped down E&P + Stable refining
In this scenario, refining and petchem spreads are maintained at base case levels, but we have
reduced E&P valuation. Accordingly, we factor in pessimistic reserve estimate of 8tcf in KG-D6
(vs 12tcf for base case and 10tcf in FDP) and value KG-D6 at Rs113 (Rs135 under base case).
We also add the value of ‘known reserves’ of CBM and NEC 25 at Rs30 (Rs38 in base case) to
arrive at domestic E&P value (ex-PMT) of Rs143/sh. However, we don’t ascribe any exploration
premium (20% in base case) either in E&P in this scenario.
Scenario 2 – Refining trough + bare-bone valuation of E&P
Under this scenario, we lower RIL’s refining margins to near bottom levels of US$7.5/bbl
(average/median during 2009-10) in addition to the pessimistic valuation for E&P value at Rs143
(discussed in Scenario 1). Value of investments and net debt is as per base case and based on
March-12 cash balance. Our SOTP in this case comes to Rs 811. The current stock levels of
Rs760 therefore seems to be factoring in not only the distressed valuations for E&P/Refining, but
also discounting the value of cash on books (Rs505bn, Rs170/sh as on Mar-12E) to some extent.
Scenario 3 - What if everything that can go wrong, does?
To factor in global risk and concerns about RIL’s cash reinvestment, we value March-12 cash
balance at 50% discount in addition to factoring in a pessimistic GRM of US$7.5/bbl and
distressed valuations of D6/E&P. Accordingly, our SOTP in this scenario comes to Rs679. We
believe this scenario takes a very pessimistic view on the returns which RIL can generate from
deployment of the cash. At current levels, the stock is already factoring in a 20-25% discount
to cash balance, thus offering a favourable risk-reward, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RIL’s current valuation corresponds to (1) distress
GRMs (US$7.5), (2) bear case value of D6/known
reserves, (3) no exploration premium and (4) cash +
other investments valued at ~20% discount.
Combining distress valuations on E&P/refining with 50%
discount on cash, yields worst case SOTP of Rs679.
Fear of value destruction in cash seems exaggerated;
maintain OP with target of Rs969 (Rs1,050 earlier).
We cut FY12-14E EPS by 5-8% on lower oil/gas
production and lower GRMs; refining/petchem valued at
6.5x EBITDA to factor in risks of a global slowdown.
Valuation below worst case refining/E&P value. We
estimate an SOTP of Rs811 based on (1) GRM of US$7.5
(median during 2009-10), (2) bear case D6 value of
Rs113/sh at 8tcf recovery and (3) no exploration premium
for other discovered/un-discovered assets (D3, D9, KG-D4,
MN-D4, CY-D5). Current valuations therefore seem to imply
“value destruction” in cash and other investments.
What about the cash, though? We believe the market is
now factoring in ~20% discount on the cash on books, in
addition to the distressed values of E&P/refining as above.
RIL has a problem of plenty; we estimate cash balance
>US$11bn on Mar-12E post the completion of the BP deal.
The recent investments have been small and in diversified
sectors (telecom, financial services, hotels), raising fears of
either lack of investment options and/or sub-par returns on
its diversifications. If everything than can go wrong does,
then at 50% discount to cash + other investments, and
distress valuation for refining/petchem – the worst-case
SOTP works out to Rs679.
However, re-investment concerns overstated now.
Current valuations reflect a very pessimistic view on the
“value destruction” from investments & cash on the books.
At current levels, the stock is already factoring in ~20-25%
discount to cash balance, thus offering a favourable riskreward. Maintain OP with a price target of Rs969.
Earnings adjusted down for macro risks and E&P rampup. We cut FY12-14E earnings by 5-8% on (1) marginally
lower GRMs of US$10.0/10.3/10.5 for FY12-14E vs.
US$10/10.5/11.0, (2) lower oil/gas production from D6 over
FY12-14E (49/51/55 vs. 51/55/60mmscmd) and (3) lower
petchem margins to reflect emerging macro risks.
Base case:
Our revised base case price target for RIL is now Rs969 vs. Rs1,050 earlier. This is a result of
earnings revision as well as lowering of the valuation multiple for the refining and petrochemical
business, given the evolving risks of a global slowdown.
We cut FY12/13/14E earnings by 5-8% to factor in the following changes:
1. Even as we have maintained our FY12 refining margin assumptions at US$10/bbl (1Q FY12
at US$10.3/bbl and 2Q Singapore refining margins at 1Q levels of US$8.5/bbl), we have
marginally reduced FY13/14E GRMs to US$10.3/10.5/bbl vs US$10.5/11.0/bbl earlier.
2. We have moderated KG gas volumes to 49/51/55mmscmd for FY12/13/14E vs
51/55/60mmscmd assumed earlier. We have also cut oil production at MA to current levels
of 15kbpd for FY12/13/14 vs19/25/25kbpd earlier.
3. We have also lowered petchem and polyester spreads to reflect 1Q weak spreads and
potential slowdown in demand.
4. Higher tax rate
We now value the refining and petchem business at EV/EBITDA of 6.5x FY13E vs. 7.0x earlier,
to factor in headwinds facing the global demand scenario.
In order to get a sense of what’s factored in at the current stock levels and the resultant riskreward, we have modelled three scenarios factoring in different refining margins and E&P values
and back calculating to assess what the current market price seems to be factoring in.
Scenario 1 – Stripped down E&P + Stable refining
In this scenario, refining and petchem spreads are maintained at base case levels, but we have
reduced E&P valuation. Accordingly, we factor in pessimistic reserve estimate of 8tcf in KG-D6
(vs 12tcf for base case and 10tcf in FDP) and value KG-D6 at Rs113 (Rs135 under base case).
We also add the value of ‘known reserves’ of CBM and NEC 25 at Rs30 (Rs38 in base case) to
arrive at domestic E&P value (ex-PMT) of Rs143/sh. However, we don’t ascribe any exploration
premium (20% in base case) either in E&P in this scenario.
Scenario 2 – Refining trough + bare-bone valuation of E&P
Under this scenario, we lower RIL’s refining margins to near bottom levels of US$7.5/bbl
(average/median during 2009-10) in addition to the pessimistic valuation for E&P value at Rs143
(discussed in Scenario 1). Value of investments and net debt is as per base case and based on
March-12 cash balance. Our SOTP in this case comes to Rs 811. The current stock levels of
Rs760 therefore seems to be factoring in not only the distressed valuations for E&P/Refining, but
also discounting the value of cash on books (Rs505bn, Rs170/sh as on Mar-12E) to some extent.
Scenario 3 - What if everything that can go wrong, does?
To factor in global risk and concerns about RIL’s cash reinvestment, we value March-12 cash
balance at 50% discount in addition to factoring in a pessimistic GRM of US$7.5/bbl and
distressed valuations of D6/E&P. Accordingly, our SOTP in this scenario comes to Rs679. We
believe this scenario takes a very pessimistic view on the returns which RIL can generate from
deployment of the cash. At current levels, the stock is already factoring in a 20-25% discount
to cash balance, thus offering a favourable risk-reward, in our view.
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