>RELIANCE INDUSTRIES (CITI)

FY10-FY11E EPS cut but 2 year EPS CAGR still 34%; Buy

FY10E Brent price forecast has been raised by 12% to US$56/bbl. This should have meant 2% upgrade in RIL’s EPS. However, a cut in KG D6 gas production rate now assumed by us has meant 6% cut in RIL’s EPS. FY11E Brent price has been cut by 11% to US$62/bbl. This has meant just 2% cut in RIL’s EPS given its low sensitivity to oil prices. RIL’s PO is also cut by 3% to Rs1,540/share as E&P valuation is cut to factor lower oil price and lower gas output now assumed in FY10E. RIL’s strong earnings growth story due to KG D6 gas and new refinery is intact, in our view, with 2-year EPS CAGR to FY11E still at 34%. We retain Buy on RIL

FY10E EPS cut as KG D6 gas output rate cut to 45mmscmd
RIL has guided that KG D6 gas should ramp up to peak rate of 80mmscmd by March 2010. However, KG D6 average gas production rate in FY10E may be lower than 60mmscmd assumed earlier by us. We have now cut average gas production rate to 45mmscmd. This has meant 6% cut in its FY10E EPS.

Upside risk to FY10E EPS from weaker rupee
RIL’s FY10E EPS is based on rupee at Rs46 vis-à-vis US dollar. The rupee is currently far weaker at over Rs51. RIL gains from a weaker rupee. Its FY10E EPS would be 11% higher than base case at Rs143.7/share if rupee averages Rs50.

PO cut by 3% to Rs1,540; E&P valuation cut 5% to Rs814
Cut in oil price assumption and lower gas production in FY10E than earlier assumed has meant cut in RIL’s E&P valuation by 5% to Rs814/share from Rs855/share earlier. This has led to a cut in RIL’s PO by 3% to Rs1,540/share. Our PO is based on exchange rate of Rs46. It would be 10% higher, at Rs1,691/share, if Rs50 is taken as exchange rate to calculate PO.

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