>Reliance Industries (BNP PARIBAS)

All priced in: time to get out

Recent rally overdone – no major catalysts lined up
RIL’s shares have gained 43% YTD, compared with the BSE Sensex at 15%. During this time, the gas sale ban on RIL has been lifted and the company has had favorable pricing of USD4.20/mmbtu to sell the gas (reflected in our TP). In addition, the company successfully started gas production and commenced sales from Reliance Petroleum Ltd (RPL). We believe all the above positives are priced in the shares at current levels. The current price factors in GRMs of 13.0/bbl and Petchem EBIT margins of 13.3%, which are significantly higher than our expectations, and also do not tie in with the global outlook for the refining and petchem businesses. For FY10, we expect consolidated GRMs at 9.5/bbl and petchem margins of 10.3%.

In-line quarter; no positive surprises
RIL reported its 4QFY09 results in-line with our estimates with PAT coming in at INR38.74b versus our estimate of INR38.53b. RIL’s GRMs came in at USD9.9/bbl versus our expectation of USD11/bbl. In our view, the GRMs were disappointing considering there was little crude volatility for 4QFY09 and lack of meaningful inventory losses as seen in
3QFY09. However, the weakness in refining was more than offset by the petchem business, which saw ~4% q-q increase in EBIT while the EBIT margins jumped from 13.1% for 3Q to 17.7% for 4QFY09 led by a combination of price increases and inventory valuation gains. Overall, the petchem business offset the weakness in refining.

Valuation – limited case for upside to TP
We are downgrading RIL to a REDUCE rating, primarily on the back of recent rally which we believe fully prices any near-term catalyst. Our TP goes up to INR1,450/share from INR1,322/share accounting for USD4.20/mmbtu for the entire production and change in house crude and currency estimates. We estimate GRMs of USD9.5/bbl and Petchem EBIT margin of 10.3% for FY10. We value the refining and petchem business at 6x EV/EBITDA, which is at the high-end of trough multiples for refiners and petchem companies as seen in the previous downcycles. We do not assign any option value to any block, wherein production/reserve news flow is not expected in the next 18-24 months.

To see full report: RIL