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Now it becomes attractive
ƒ Weak US and Euro growth outlook leads to R & P de-rating
ƒ But recent correction accounts for the decline in Ref & Pet
ƒ Worst case value: PMT+D6+shale+de-rated R&P = INR712/sh
ƒ Reiterate BUY at SoTP based TP of INR900; Valuation play
RIL now makes a case for itself
Recall, in our last update “E&P stalls, Ref
& Pet Hold” 21 July 2011, (see link http://indiaer.blogspot.com/2011/07/reliance-industries-e-stalls-ref-pet.html) we provided
detailed analysis on RIL concluding that a
re-rating was some time away and
valuations at that time provided only a
10% upside to play for, which in our view
was not very appealing. Since then, the
shares of RIL have corrected ~16% and
now the potential upside is looking
appealing. We do not expect demand
destruction of the same kind as seen in
the last downturn and taking a
conservative view on current margins; we
expect in the worst case, GRM’s to dip to
USD8.5/bbl and see very limited downside (Exhibit 2). We also do not
include the BP cash which due to decline in E&P valuations will act as a
cushion and also provide a floor for the E&P valuations.
We reduce earnings estimate for possible Ref weakness
We reduce FY12-14 earnings estimates by 5-10% primarily on lowering
our GRM assumptions and EBIT margins in petrochemical segment on
potential margin compression on the back of weak demand cues from
major export destinations like the US and Eurozone. We gather from
company data that these two regions contribute close to 30% of refining
exports. We now assume blended refining GRMs of USD9.75/bbl (earlier
USD10.5) in FY12 and USD10.5/bbl (earlier USD11) for FY13. We
reduce EBIT margins by 100ppt in petrochemical segment for FY12/13,
to 13% and 14% respectively. During the last downturn in FY09, RIL’s
petrochemical EBIT declined as low as 11.5%. We see 3% EPS impact
for every 1% negative impact to petrochemical EBIT margins, and c.6%
EPS impact for every USD1/bbl reduction in refining GRMs.
Valuations now a good enough reason to accumulate
We reiterate our BUY rating on RIL with a revised TP of INR900 (prior TP
of INR965). Revisions come primarily on back of reduced GRMs to
capture potential weakness in demand from the West and also to present
a conservative earnings profile while still presenting attractive upside
from CP. RIL due to negative news flow on E&P has seen a severe
multiple de-rating and at current levels is trading at 11.5x times FY12E
EPS and 7x EV/EBITDA as compared to five year historical average of
16x times and 11x times. During the downturn RIL traded in line with
recent valuations at 11x earnings. We recommend RIL as a valuation
play with limited downside. While we acknowledge the absence of any
near-term catalysts, the recent correction makes the shares attractive.
Risks: Further decline in E&P and Refining.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Now it becomes attractive
ƒ Weak US and Euro growth outlook leads to R & P de-rating
ƒ But recent correction accounts for the decline in Ref & Pet
ƒ Worst case value: PMT+D6+shale+de-rated R&P = INR712/sh
ƒ Reiterate BUY at SoTP based TP of INR900; Valuation play
RIL now makes a case for itself
Recall, in our last update “E&P stalls, Ref
& Pet Hold” 21 July 2011, (see link http://indiaer.blogspot.com/2011/07/reliance-industries-e-stalls-ref-pet.html) we provided
detailed analysis on RIL concluding that a
re-rating was some time away and
valuations at that time provided only a
10% upside to play for, which in our view
was not very appealing. Since then, the
shares of RIL have corrected ~16% and
now the potential upside is looking
appealing. We do not expect demand
destruction of the same kind as seen in
the last downturn and taking a
conservative view on current margins; we
expect in the worst case, GRM’s to dip to
USD8.5/bbl and see very limited downside (Exhibit 2). We also do not
include the BP cash which due to decline in E&P valuations will act as a
cushion and also provide a floor for the E&P valuations.
We reduce earnings estimate for possible Ref weakness
We reduce FY12-14 earnings estimates by 5-10% primarily on lowering
our GRM assumptions and EBIT margins in petrochemical segment on
potential margin compression on the back of weak demand cues from
major export destinations like the US and Eurozone. We gather from
company data that these two regions contribute close to 30% of refining
exports. We now assume blended refining GRMs of USD9.75/bbl (earlier
USD10.5) in FY12 and USD10.5/bbl (earlier USD11) for FY13. We
reduce EBIT margins by 100ppt in petrochemical segment for FY12/13,
to 13% and 14% respectively. During the last downturn in FY09, RIL’s
petrochemical EBIT declined as low as 11.5%. We see 3% EPS impact
for every 1% negative impact to petrochemical EBIT margins, and c.6%
EPS impact for every USD1/bbl reduction in refining GRMs.
Valuations now a good enough reason to accumulate
We reiterate our BUY rating on RIL with a revised TP of INR900 (prior TP
of INR965). Revisions come primarily on back of reduced GRMs to
capture potential weakness in demand from the West and also to present
a conservative earnings profile while still presenting attractive upside
from CP. RIL due to negative news flow on E&P has seen a severe
multiple de-rating and at current levels is trading at 11.5x times FY12E
EPS and 7x EV/EBITDA as compared to five year historical average of
16x times and 11x times. During the downturn RIL traded in line with
recent valuations at 11x earnings. We recommend RIL as a valuation
play with limited downside. While we acknowledge the absence of any
near-term catalysts, the recent correction makes the shares attractive.
Risks: Further decline in E&P and Refining.
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