>Reliance(Goldman Sach)

Reliance Industries (RIL) reported 2QFY09 PAT of Rs.41.2bn, up 7% YoY, ahead of our estimate of Rs37.5bn primarily on the back of: 1) better than expected operating performance in petchem divison, and 2) refinery inventory gain of US$0.5/bbl against our estimate of US$2.0/bbl inventory loss. Refining margins of US$13.4/bbl was consequently ahead of our estimate of US$10.5/bbl. Petchem EBIT margin stood at 12.2%, up 160bp QoQ, reflecting robust product prices and low naphtha costs.
We expect the petchem margins to remain stable in the near term due to further delays in the new Middle Eastern capacities to 1Q2009, although we have a cautious outlook on refining margins. With oil production having started in 3QFY09 and gas production expected in 4QFY09, we believe that the E&P division will drive RIL earnings growth going forward.

What to do with the stock

We retain Buy rating on RIL with SOTP-based 12-month TP of Rs1,980,
implying upside potential of 63% from current levels. RIL is our top pick in the Indian energy space. We estimate RIL to report EPS CAGR of 32% during FY08-11E and to generate operating cash flow of US$6.5bn in FY10E. RIL currently has net debt/equity of about 0.36x. Risks: Execution risk/production delay in D-6.

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